Non Consumer Debt and Bankruptcy

When filing Chapter 7 bankruptcy, the debtor needs to complete a means test to determine if it has too much disposable income to qualify for a Chapter 7 discharge. There is, however, one big exception to that rule.

The exception is that the debtor who is a majority non-consumer debtor (meaning that  the debtor has numerically more debt for non-consumer purposes than for consumer purposes), is exempt from completing the means test and from the qualifications of 11 USC 707(b).

The significance is the debtor could theoretically have more disposable income that would ordinarily be allowed to qualify for a Chapter 7 discharge, but still gets a discharge.

Typically the person who is in this situation has a failed business, or gave a big personal guarantee on a business venture that failed, or has a bunch of real estate rental properties that are underwater. So this person has incurred a whole bunch of non consumer debt, which exceeds the value of its consumer debt consumer debt. Consumer debt is typically a residential mortgage, a car loan or credit card debt.

In this scenario, the debtor with majority non-consumer data does not have to take the means test. That same debtor would presumably also be ineligible for Chapter 13 bankruptcy because it would probably have more debt than is allowed for that chapter. Congress thus presumably carved out this exception so the debtor does not have to choose between Chapter 11 or no bankruptcy at all.

Note that this debtor could still have substantial assets that need to be liquidated in Chapter 7. That is however independent of the fact the debtor could still get a Chapter 7 discharge even if it’s currently making too much money for Chapter 7 had the majority of the debt been consumer debt.