If the majority of your debt is business debt, you don't have to pass the means test of file for Chapter 7 bankruptcy. Here's the lowdown on the means test, what counts as business debt, and whether you should file for Chapter 13 even if you qualify for Chapter 7.
The Chapter 7 Means Test
To file for Chapter 7, you must pass the means test. The means test compares your average monthly income during the six months before you file to the median income in your state. If your income is less than the median, you may use Chapter 7. Those with higher incomes must subtract certain allowed expenses from their income to see whether they would have enough left over to pay off some of their debts. Filers whose disposable income exceeds a minimum amount set by law won't be allowed to use Chapter 7. Instead, they'll have to use Chapter 13 -- and repay some of their debt over a five-year period -- if they want to file for bankruptcy.
High Income Filers Must Use Chapter 13, Unless the Majority of the Debt is Business Debt
Most filers who have a choice opt for Chapter 7 because it doesn't require a repayment plan. But those with higher incomes often don't have this choice, unless they fit into the business exception: If the majority of your debt comes from the operation of a business, you don't have to take the means test. You are free to use Chapter 7, no matter how high your income.
What Counts as Business Debt
If more than half of your debt load is from business debt, you qualify as a "non-consumer debtor," and you don't have to take the means test. Business debts include credit card debt incurred for your business; car loans for work vehicles; money you owe on your business lease or mortgage; debts you owe to suppliers, vendors, and so on; and any other debts you incurred in your business. It also includes all tax debts, whether on your business or your personal income.
What Doesn't Count: Your Home Mortgage
To fit within this means test exception, the majority of your debt -- more than 50% -- must come from your business. Even if you have significant business debt, you will still have to take the means test if your personal debts are more than half of your debt load. If you have a mortgage on your home, for example, you must include that amount in calculating your personal debts. This rule puts the business debt exception out of reach for many small business owners.
Chapter 13 Could Be a Better Choice
Even if you are free to use Chapter 7 thanks to the business debt exception, you may not want to. For example, if you own valuable property that you can't protect with an exemption, you may lose it if you file for Chapter 7. The trustee can take your nonexempt property, sell it, and distribute the proceeds to your creditors. If you file for Chapter 13 instead, you get to keep all of your property.
If you are behind on your mortgage or car payments but want to keep your property, Chapter 13 might be a good choice. In Chapter 13, you can make up debt arrearages over time, as part of your repayment plan. As long as you pay off your missed payments in your plan and stay current on your payments going forward, you can keep your property.
To learn more about bankruptcy for business debt, see Bankruptcy for Small Business Owners.
Getting Legal Help
If most of your debt comes from the operation of a business, you are free to choose between Chapter 7 and Chapter 13. If you have any questions about which option is best for you, consult with an experienced bankruptcy lawyer.
