Misunderstanding The "Business Debt" Exemption From The Chapter 7 Means Test

Too many people do not understand the "business debt" exemption from the means test. It seems that there is a consensus understanding among attorneys, bankruptcy attorneys and others too, that a prospective debtor is exempt from the means test if he has business debts in excess of his credit card, mortgage, car and other consumer debt. That is not exactly correct. I spoke with a potential bankruptcy client who said that two attorneys told him he could not file bankruptcy because his income was too high. Last year, this debtor and his spouse earned $385,000.00. He owned about $125,000 in credit card debts and had two home mortgages and car loan totaling about $600,000. The debtor also owned three rental homes with mortgages totaling $450,000. He wanted to walk away from the houses and discharge the mortgage debts. The rental real estate mortgages were his only "business debt." Two attorneys advised him that he was ineligible to file Chapter 7 bankruptcy because of his relatively high income and because his consumer debts of $725,000 ( credit cards, home mortgage, car loans) exceeded his "business debt" of $450,000. The debtor and his spouse also owed the IRS approximately $400,000 of personal income taxes for taxes due over the past five years. This debtor should be able to file Chapter 7 in spite of his $385,000 income. The means test exception does not compare consumer debts and business debts; the test compares consumer debts and non-consumer debts. This debtor's non-consumer debt includes his rental home mortgages of $450,000 and his tax debts of $400,000. His non-consumer debts exceeds his consumer debts, and therefore, the means test is not applicable. It so happens that the debtor cannot discharge most of his IRS debts. However, he can consider Chapter 7 bankruptcy even if he has a high taxable income.

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