Bankruptcy Means Test,
Debtors and Abuse of Chapter 7
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Debtors whose debts are primarily business
debts or other non-consumer debts are not subject to the Means Test and
other provisions under 11 U.S.C. §707(b). The provisions of §707(b) are
those provisions under which the U.S. Trustee may move dismiss or
convert a Chapter 7 case for abuse of Chapter 7.
The provisions applying the Mean Test and
other provisions of §707(b) are only for cases of "primarily consumer
debts." A “consumer debt” is “debt incurred by an individual primarily
for a personal, family or household purpose.” If the debts are not
primarily consumer debts, the U.S. Trustee cannot pursue the abuse
provisions of 11 U.S.C. §707. In particular, debtors with primarily
business debts and/or other non-consumer debts are not be required to
file a Means Test.
This inquiry is commonly viewed as consumer
debts versus business debts, but instead, it is an issue of consumer
debts versus non-consumer debts. “Business debt” is distinguished from
“consumer” debt as a debt incurred with a “profit motive.” However the
non-consumer debt inquiry is broader than just business debts. There are
varieties of debts that have held to be neither a business debt nor a
“‘Primarily’ means ‘for the most part.’
Webster's Ninth New Collegiate Dictionary 934 (1984). Thus, when
“the most part” - i.e., more than half-of the dollar amount owed is
consumer debt - the statutory threshold is passed. In re Kelly,
841 F.2d 908, at 913 (9th Cir. 1988).
The Purchase Money Security secured by
Personal Residence are consumer in nature. However, if a mortgage is
used to fund a business, the Debt may be characterized as non-consumer.
The Fifth Circuit Court of Appeals used "the profit motive test"
regarding three separate loans secured by a residence: “The district
court erred, however, in its classification of the entire $152,507.99 as
consumer debt. Only $75,000 was used to pay off the mortgage on the
residence; the remainder, $77,507.99, was applied to the marina venture.
Only the initial $75,000 may be properly characterized as consumer debt.
Similarly, the district court erred in its determination that a
signature loan, no matter what use to which it is put, is always
So a refinance or a home equity loan used
to finance a business or some other non-consumer debt will be rightly
characterized as a non-consumer debt.
Domestic Support Orders.
In weighing where alimony is a
consumer debt, the Courts look to the profit motive. [T]he weight of the
case law on this issue conclusively shows it is a “consumer debt” if it
is based on a non-profit motive. In re Stewart, 175 F.3d 796, at
807(10th Cir. 1999). In Stewart, the Court found the alimony is
consumer debt as it was awarded for the former spouse for her support
and benefit and not for a profit motive. See also In re Kestell,
99 F.3d 146, 149 (4th Cir.1996).
Personal income tax debts are
not consumer debts. In re Westberry 215 F.3d 589 (6th Cir. 2000).
The Sixth Circuit in Westberry rejected the application of the
profit motive test to determine if personal income taxes are not
consumer debts. Rather, the Court found that personal income taxes were
distinct from consumer debts for these reasons:
Tax debts are not incurred like
consumer debts. Consumer debts are incurred voluntarily. Taxes are
Consumer debts are incurred for
personal and household purposes. Taxes are assessed for the public
Taxes arise from the earning of money.
Consumer debts result from consumption. In re Westberry, 215
F.3d 589, 591 (6th Cir. 2000).
Personal Injury and Tort
Debts. Debts resulting from
motor vehicle accidents are not consumer debts. The Courts distinguish
consumer debts from non-consumer debts on the basis that consumer debts
are voluntarily incurred for family, household and personal purposes.
There is a split as to whether or not
student loans are per se non-consumer debts. Rather, the Courts will
look to determine how the money was spent. See In re Stewart, 175
F.3d 796 (10th Cir. 1999); cf. In re Wisher, 222 B.R. 634 (Bankr.
D.Colo. 1998) [there was no testimony regarding how the student loan was
used, so the Court held it was consumer debt]; In re Vianese, 192
B.R. 61 (Bankr. N.D.N.Y. 1996) [student loan for children’s education is
a consumer debt]. In In re Stewart, 175 F.3d 796 (10th Cir.
1999), the Tenth Circuit looked to the evidentiary record and determined
that a substantial portion of student loans were used for family
expenses as opposed to tuition, books or other direct educational
Personal Credit Card (cash advances put directly
into a business account). The Court in In re Traub, 140 B.R.
286 (Bkrtcy.D.N.M.,1992) held that, on the debtor’s uncontradicted
testimony that he used a credit card solely for business, such debt was
business or non-consumer. Use of overdraft line and credit cards for
“dabbling” in the stock market was consumer debt in In re Berndt,
127 B.R. 222 (Bankr. D. N.D. 1991).
When dealing with debtors with substantial
business debt, tax debt, or student loans, a side-by-side analysis is
always the first step to determine the debtors eligibility for Chapter 7