Most individuals who file bankruptcy under Chapter 7 or Chapter 13 must complete a means test, which calculates your ability to repay creditors based on your last six months' income and certain allowed expenses. There are a few exceptions to the means test requirement, however. Certain bankruptcy debtors do not have to complete the means test.
(To learn about the means test, see Chapter 7 Eligibility & the Means Test.)
Debtors Whose Debt is Primarily Business Debt
If your debts are primarily business debts, you do not have to pass the means test. Courts often use a profit motive test to determine if a debt is a business debt. Business debts often include debts you incurred when you personally guaranteed loans to your business. Some jurisdictions consider tax debt (including personal tax debt) to be business debt (because you did not incur it voluntarily as a means of making a profit).
For your debts to be primarily business debts, more than 50% of your total debt must be business debt. That includes all debt from credit cards, student loans, the IRS, car loans and home mortgage loans.
Example. Say you have personal credit card debt of $5,000, a home mortgage of $150,000, a car loan of $10,000, and business debt of $175,000. In this situation, your total debt would be $335,000. Your business debts ($175,000) would comprise more than half of your total debt (half of your total debt would be $167,500). You would not have to pass the means test. However, you may have to prove to the bankruptcy court that your debt is business debt and not personal debt.
You may also be excused from completing the means test if you are a disabled veteran and incurred most of your debt while you were on full-time active duty or while you were performing a homeland defense activity, which includes any activity you take for the military protection of the U.S., its citizens, or its property from a threat or aggression against the U.S.
To be a disabled veteran, you must be entitled to disability compensation rated at 30% disabled or more, or your release or discharge from active duty must have been because of a disabling injury you incurred or aggravated in the line of duty.
For example, if you were an active duty Marine and the Corps gave you an honorable discharge because you were disabled during combat, and you incurred most of your debt while you were an active duty marine, the means test does not apply to you.
Reservist or National Guard
There is also a military exclusion for military reservists and National Guard members. If you are a military reservist or a member of the National Guard, you do not have to complete the means test during active duty or for 540 days after your active duty ends, as long as you serve at least 90 days. Once the 540-day period is over, you must complete the means test unless the time for objecting to it has passed.
For example, if you are in the Army reserves and are called to active duty, you do not have to file the means test while you are in active duty or for 540 days after your active duty ends, as long as you serve in active duty for at least 90 days.
Learn about about the rules for filing Chapter 7 in our section on Chapter 7 Bankruptcy.