Bankruptcy’s Means Test Doesn’t Apply to All

New bankruptcy lawyers sometimes forget in the flurry over getting the means test right that it only applies when the debts are primarily consumer.

Primarily means over half in dollar amount.

The code defines consumer debts in §101(8) as debt incurred for a personal, family or household purpose.

You may be surprised by the kinds of debt that are not consumer debt:

  • Taxes
  • Business debts
  • Tort claims
  • Professional school loans

The last two are supported only by a few cases, but the thread of the decisions on the subject make the debtor’s election to incur the debt a deciding factor.  One doesn’t “elect”  to be subject to taxes, the courts reason, so they aren’t consumer debts. Likewise, auto accident liability.

Professional school loans perhaps come closer to being business debts rather than personal debts.  The law isn’t clear, in my view.

Mortgage debt incurred to acquire a house is personal, but a refinancing to fund a business is probably business debt.  Debt incurred to buy rental property is incurred with a profit motive, one of the courts’ favorite measures of whether a debt is or is not a consumer debt.

Then there is the business credit card.  If actually used for business, it is not a consumer debt.

So, before you chug through the means test, make sure it applies to this client.

More on bankruptcy’s  means test


  1. Thanks for this, Kathy.  Very interesting.  I have a follow-up question though.  What about a house that was initially bought for a debtor to reside in, but is now being used as a rental property (and the client is himself renting an apartment)?  If the mortgage on that now-rental property is over 50% of the debtor’s debts, would it be reasonable to argue that the majority of the debtor’s debts are business-related?

  2. And I apologize for misspelling your name.  I know it’s Cathy, but my brain lapsed.  Off to get some coffee….

  3. If you want to talk bankruptcy, I answer to Kathy, and probably to worse

    I think the weight of the cases look at the classification of the debt when first incurred.  So the former home, now a rental, is probably burdened with consumer debt. 

    There’s certainly a good faith argument that it ought to be otherwise.

  4. >Professional school loans perhaps come closer to being business debts
    rather than personal debts. The law isn’t clear, in my view.<

    Any new 9th circuit developments about this? Also, if the Means Test is required, whether student loan payments can be deducted or at least be considered as special circumstances?