Means Test Exemption For Business Debts: Which Debts Count?

The "means test" for Chapter 7 does not apply to people whose debts are primarily consumer debts. In some cases, the analysis of a debtor’s debts focuses only on unsecured debts which are the class of debt that gets discharged in Chapter 7. Specifically, where one spouse files Chapter 7 bankruptcy and the spouse owns property jointly with the non-filing spouse, the debtor’s interest in marital property is exempt only and to the extent that the debtor and non-filing spouse do not have any joint unsecured debts. Joint secured debts do not affect the exemption of joint marital property. I am involved in a case which presented the question of whether the issue of business or consumer debt for means test exemption considered unsecured business debts or both secured and unsecured business debt.

I spoke by phone with an attorney from the U.S. Trustee’s office in Orlando. The attorney confirmed that for purposes of the means test qualification the U.S. Trustee considers both unsecured and secured business debt. If most of the debtor’s debt, secured and unsecured, is not consumer debt then the debtor does not have to pass the means test to file Chapter 7. This issue is important today when so many debtors are filing bankruptcy because of failed real estate investments. Debtors who are liable for large mortgages on investment property will often be exempt from the means test even though they have high incomes. Many people who qualified for large investment mortgages did so because they had high incomes. The U.S. Trustee attorney told me their office is seeing a relatively large number of Chapter 7 bankruptcies being filed by high-income debtors who escape the means test because of their mortgages on one or more parcels of investment real estate.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida