When Can You Avoid the Means Test in Bankruptcy?
To qualify to discharge your debts under Chapter 7 today, you must typically submit to the “means test,” a formula designed to determine whether you have the resources to repay your creditors rather than simply ridding yourself of the debt. There are, however, certain conditions where you don’t have to take the means test.
The Business Debt Exemption
Referred to by some as the “business debt loophole,” this provision (set forth in Section 707 (b) of the Bankruptcy Code) states that the means test only applies to debtors with “primarily” consumer debt.
Unfortunately, when Congress enacted the new bankruptcy law in 2005, it did not provide a definition for the term “primarily.” As a practical matter, most courts have simply defined that as a simple majority. Accordingly, if more than 50% of your debts were incurred in a business or for business expenses, you don’t have to qualify under the means test.
Furthermore, the rules are not always crystal clear on what constitutes “consumer debt.” Some obligations, such as your mortgage for a primary home, are almost always considered consumer debt. But other real estate may be for your personal use or it may be considered an investment. Additionally, if a car was used exclusively or even primarily for work, it can be exempted from consumer debt. Credit card debt is customarily viewed as consumer debt, unless you can show that the credit card was used to further a business venture. Many courts hold that taxes are not a consumer debt.
The Disabled Veteran Exemption
You can waive the means test if you are a disabled veteran, under certain conditions. Your disability must be rated at least 30%, you must have suffered the injury in the course of your military duty, and you must have been discharged because of the disability.
The Reserve / National Guard Exemption
If you have been a member of the National Guard, or a reserve soldier in any branch of the U.S. military, and you were called up after September 11, 2001, you may seek an exemption from the means test so long as your debt did not predate the period of your service or arise more than 18 months after it ended.
Needless to say, the Means Test is complex and how it applies to you depends on your circumstances. The above discussion is necessarily general and may not exactly apply to you. Seek qualified legal advice.
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