U.S.Trustee Seminar Helps Clarify Means Test Exemptions

The U.S. Trustee’s office in Orlando held a seminar to discuss their application of the Means Test. Among many interesting topics were the characterization of debts as either consumer debts or business debts. The distinction is important to determine if a prospective Chapter 7 debtor is exempt from the means test. If a debtor’s debts are primarily non-consumer debts the debtor is eligible to file Chapter 7 regardless of whether he passes the means test.

I frequently meet debtor’s who moved from an expensive home into a less expensive house as their principal residence. They rent the expensive house and use the rental income to pay the mortgage. The question is whether the mortgage on the expensive home is a business debt because it is rented at time of filing bankruptcy or a consumer debt because the mortgage was taken to purchase a primary residence for personal use. The Trustee’s position is that a house formerly occupied but currently rented will be a non-consumer debt if the debtor shows the mortgage was treated as business debt on a prior income tax return.

After taking out a first mortgage to purchase a residence some debtors use a second mortgage to finance their own business. When the proceeds from a second mortgage are used mostly to pay business expenses the second mortgage is a non-consumer debt for means test purposes.

Similarly, if a debtor’s obligation to a particular credit card company had been incurred primarily to pay business, or other non-consumer expenses the balance owed to that credit card company is non-consumer debt. The Trustee’s position is that the entire credit card balance is non-consumer debt and not just those charges used to pay non-consumer expenses.

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