The couple was despondent when another bankruptcy attorney told them that, despite $100,000 in old taxes, they couldn’t file Chapter 7.
This fine fellow told them that the means test showed they had $3000 of disposable income per month. A Chapter 7 would be an abuse of bankruptcy under the law.
Only Chapter 13 was possible, he said, and the monthly payment would be $3000. That didn’t seem like any kind of relief from debts.
Only he never apparently considered the gating question: were their debts were “primarily consumer debts”.
He forgot the gotcha baked into the means test: it only applies to ***consumers.***
Only consumers have to prove they are worthy of the Chapter 7 discharge.
Folks with primarily business debts or, taxes get to skip the means test.
So, lots of disposable income is not a bar to Chapter 7 when your debts are primarily taxes.
Who takes the means test
So, just why are some above median income families not subject to the means test?
Bankruptcy Code § 707 allows a judge to dismiss a Chapter 7 case filed by an individual debtor under this chapter whose debts are primarily consumer debts …. if it finds that the granting of relief would be an abuse of the provisions of this chapter.
The means test is the tool for determining whether the debtor is (supposedly) able to pay their debts.
But, the means test only applies to debtors whose debts are “primarily consumer debts”.
So, we need to know…
What is consumer debt
The Bankruptcy Code defines consumer debt:
The term “consumer debt” means debt incurred by an individual primarily for a personal, family, or household purpose. § 101(8)
So, the gating question is: why was the debt “incurred?”
Obviously, business debt was not incurred for a personal purpose.
Further, taxes are not incurred by choice, say the cases; taxes are imposed by government. And therefor, not a consumer debt.
And that’s the rule, even when the taxes are on personal, household income, or property taxes on the family home.
So, if the total of taxes (and other, non-consumer debt) is greater than the balance of the other debt a person owes, their debt is not “primarily” consumer debt.
And the means test ONLY applies to debtors whose debts are primarily consumer debts.
Skip the means test
The couple who were told that they couldn’t file Chapter 7 because of their generous income, in fact, can file Chapter 7 because their debt is overwhelmingly back taxes.
It doesn’t matter that most of their taxes are so old that the tax is dischargeable.
If it’s tax, it isn’t consumer debt. And they can skip the test.
