If you’re struggling with debt, filing for bankruptcy can be a powerful way to regain control of your finances. However, the type of bankruptcy you file can make a significant difference in your financial future. Chapter 7 bankruptcy offers a fresh start by wiping out most debts and it only takes about 4 months from the date the case is filed until the discharge is entered. However, Chapter 13 requires a multi-year repayment plan, usually 3 – 5 years. Both are great options, but chapter 7 is cheaper, easier, and quicker.
Unfortunately, many inexperienced attorneys mistakenly push clients into Chapter 13 because they don’t fully understand the law—especially when it comes to the means test and non-consumer debt.
Understanding the Means Test and How It Affects Bankruptcy Eligibility
The means test is a financial calculation used to determine whether a debtor qualifies for Chapter 7 bankruptcy. It looks at your income and expenses to see if you have enough disposable income to repay some of your debts. If your income is too high, you may be forced into Chapter 13, where you must commit to a 3- to 5-year repayment plan.
However, what many inexperienced attorneys fail to recognize is that the means test only applies to cases where the debtor’s debts are primarily consumer debts. If your debts are primarily non-consumer debts, you do not have to complete the means test at all. This means that many individuals who are wrongfully steered into Chapter 13 could have instead qualified for a Chapter 7 discharge without having to prove financial hardship.
What Are Non-Consumer Debts?
Consumer debts are those incurred for personal, family, or household purposes—such as credit cards, medical bills, and personal loans. Non-consumer debts, on the other hand, are debts incurred for business or investment purposes. Examples include:
- Business debts (loans taken out to fund a business)
- Tax debts (IRS liabilities from self-employment or other business-related taxes)
- Personal guarantees on business loans
- Real estate investment debts
- Debts incurred through lawsuits related to business activities
If more than 50% of your total debts fall into the non-consumer debt category, you are exempt from the means test and can likely qualify for Chapter 7 bankruptcy—even if you have a high income.
How Inexperienced Attorneys Get It Wrong
Many attorneys who don’t focus on bankruptcy law—or those who simply don’t take the time to analyze a client’s financial situation properly—assume that everyone must pass the means test to qualify for Chapter 7. This is not true.
As a result, they may:
- Tell clients they must file Chapter 13 because they “fail” the means test—even when the means test doesn’t apply.
- Overlook key details about business debts or tax debts that could classify the case as primarily non-consumer.
- Fail to fight for their client’s right to file Chapter 7, forcing them into an unnecessary repayment plan that lasts years.
- Tell clients they have to file a Chapter 13 because they also do not know how to strategize a case to use the law to the benefit of their clients.
For someone drowning in debt, the difference between Chapter 7 and Chapter 13 is huge. Instead of discharging debts quickly, an improperly filed Chapter 13 case can lock you into years of payments—money that could be going toward rebuilding your financial future.
Work with an Experienced Bankruptcy Attorney
If you’ve been told that you don’t qualify for Chapter 7 because of the means test, get a second opinion. You may have more options than you think—especially if a significant portion of your debt is related to business, taxes, or investments. In the same token, some attorneys do not understand that certain debts may not be eligible for discharge in a chapter 7 but are dischargeable in a chapter 13, most notably are debts associated with a martial equalization payment or property settlement.
As an experienced California State Bar Certified Bankruptcy Specialist with 25 years of experience, I know the ins and outs of the law and how to properly analyze your debt to determine the best path forward. Don’t let bad advice trap you in an unnecessary repayment plan. Call me today for a free consultation (844)894)4440, and let’s determine the best solution for your financial future.
Author: Jenny L. Doling, Esq., LLM Taxation
CA State Bar Certified Bankruptcy Specialist
NACBA – Vice President
San Diego Bankruptcy Forum – Immediate Past President
Serving Bankruptcy Clients throughout California and
Tax Clients Nationally