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BANKRUPTCY MEANS TEST APPLIES TO CONSUMER BANKRUPTCY ONLY

Posted on December 4th, 2014

By Ben Wright of Wright Law Offices.

Arizona residents considering bankruptcy need to be aware that there is a difference between a consumer bankruptcy filing and a business bankruptcy filing.   In other words, there are different rules that need to be followed depending upon where and how your debts are incurred.

Bankruptcy code 11 U.S.C. Section 707(b) essentially states that a bankruptcy case can be dismissed if there is a finding of abuse via the  “means test”.  However, one piece of good news is that the bankruptcy means test only applies to debtors who have primarily consumer debts.

The definition of “primarily consumer debts” needs to be determined in order to make sense of this provision.  The definition of primary is deemed to be anything over 50% of your total debts.  A consumer debt is a debt that is incurred by an individual for a personal, family or household purpose.  All debts outside of this scope will not meet this definition and will not be deemed to be consumer debts.

For example, if an individual incurred $26,000 of credit card debt used to purchase vehicles, food, and clothes but also incurred $30,000 of credit card debt used to start a business that later failed, the bankruptcy means test would not apply to that individual pursuant to 707(b).

In summary, there is a distinct advantage to individuals who have non-consumer debts because they will avoid having to undergo the rigorous means test to determine their qualification for chapter 7 bankruptcy.  Meanwhile, those debtors who need to file a consumer bankruptcy will need to pass the means test in order to qualify for chapter 7.

Rather than attempting to navigate the plethora of different bankruptcy laws, it is usually best to consult a Bankruptcy Attorney in your area.

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