An issue commonly overlooked by bankruptcy practitioners is the distinction between consumer and non-consumer debts and the applicability of 11 USC 707(b) (dismissal of a case).
There are two common reasons why a Chapter 7 Debtor will be denied a discharge. The applicable code sections are 11 USC 707(a) and (b). (For the full text of the code, please see http://www4.law.cornell.edu/uscode/11/707.text.html)
11 USC 707(a) provides that a Debtor’s case may be dismissed for unreasonable delay, failure to pay any applicable fees, or failure to abide by a court order/applicable rule. In the vast majority of cases, as long as a debtor cooperates with counsel, the local and US Trustee, and the court, a dismissal under this section is rare.
The vast majority of Chapter 7 cases that do get dismissed are pursuant to 11 USC 707(b). This section provides that a case may be dismissed “if the granting of relief would be an abuse…” This section only applies to “an individual debtor…whose debtors are primarily consumer debts.” Accordingly, if the majority of your debts are “non-consumer,” then this section is inapplicable!
So what is the distinction between “consumer” debts and “non-consumer” debts? 11 USC 101(8) defines “consumer debt” as “debt incurred by an individual primarily for a personal, family, or household purpose.” Unfortunately, 11 USC 101 does not provide a similar definition for “non-consumer” debts. In practice the courts have included the following in this category: business debts (including business leases, business lines of credit, personal loans, SBA loans, business liens, etc), rental properties, and delinquent income tax to name a few.
Why should those with “non-consumer” debts be treated differently than those whose debts are primary “consumer”? The reason we have the distinction is to protect those entrepreneurs and small business owners who are willing to personally take on the financial risk of opening up a business (which in turn feeds our economy). Recent studies show that small businesses create up to 75% of all new jobs in our economy and they make up more than 99.7% of all employers. We do not want to penalize these individuals, we want to promote and encourage individuals to take on the risk associated with starting a new business which in turn create jobs and feeds our economy.
So what does all this mean? When determining the applicability of 11 USC 707b, add up all of your secured and unsecured “consumer” debts, add up all of your secured and unsecured “non-consumer” debt, if more than half of your total debt is “non-consumer” debt, then: 1) the means test is inapplicable; and 2) your case can not be dismissed pursuant to 11 USC 707(b) (abuse).
Bob, a contractor, has suffered a large business loss over the past three years. Unable to keep his business afloat, he has no choice but to file for bankruptcy protection and obtain a fresh start. Bob’s debts include: encumbered tools with a lien balance of $10,000, a SBA business loan in the amount of $65,000, a truck solely used for business purposes with a balance of $5,000, personal credit cards with a total balance of $15,000, a personal automobile with a balance of $3,000, and a mobile home he resides in with a balance of $60,000. Doing the math, Bob’s total “non-consumer” debt would consist of the tool loan, SBA loan, and business truck loan for a total of $80,000. Bob’s total “consumer” debt would include his personal credit cards, personal automobile, and mobile home for a total of $78,000. Since total “non-consumer” debt exceeds “consumer” debt, the means test and 707(b) are inapplicable. Theoretically, Bob would qualify for Chapter 7 bankruptcy, even if he recently started a job that paid him $500,000 annually (though there are many other factors to consider including pre-bankruptcy transfers, conveyances, asset planning, etc).
As always, it is extremely important that you consult with a competent bankruptcy attorney in your area who can fully evaluate your case!
Tags: Business Bankruptcy, chapter 7, Consumer Bankruptcy, debt, Economy
Unfortunately, congress forgot about the jobs created by entrepreneurs with mortgages.