Consumer Bankruptcy -

     The term "consumer bankruptcy" sometimes called personal bankruptcy is not defined per se in the Bankruptcy Code. However, in general use it means a case, either Chapter 7, 11 or 13, filed by an individual who is not engaged in business and whose debts are mostly consumer, as opposed to business, in nature. The term "consumer debt", on the other hand, is defined in the Bankruptcy Code. Section 101(8) says that it is a "debt incurred by an individual primarily for a personal, family or household purpose". It includes most run-of-the-mill bills such as personal loans, credit card debt, car loans, home mortgages, and income taxes.

Consumer Debt

     The definition of consumer debt is thus a key consideration in determining if the debtor needs to pass the means test or not. Some cases appear to be clear-cut: if the debtor has never been in business, then he is likely to have only consumer debts. However, some individuals have a mixture; some consumer and some business. For instance, a sole proprietor of a business may be unable to obtain credit in his business, and ends up using a personal, consumer, credit card for business purposes, e.g., to buy supplies, pay rent, etc. Or the same individual may be the sole shareholder, officer and director of a company. He may make a loan to the company, from money he obtained by taking out a second trust deed, home equity line of credit, on his personal residence. The mortgage which would normally be a consumer debt, may end up being considered a business debt. In close calls, the debtor's attorney should carefully review the debtor's obligations, to see what category they fall in.

     If the individual Chapter 7 debtor has primarily business debts, then he needs to fill out only the first page of Form 22-the "means test", and does not have to fill out the remaining 8 pages, because he is exempt from consideration.

Filing Chapter 7

     An individual who files Chapter 7 having primarily consumer debts faces a possible dismissal of his case under Bankruptcy Code Section 707(b), or conversion to Chapter 11 or 13, if granting the Chapter 7 relief would be a "substantial abuse" of that chapter. It goes on to define substantial abuse in primarily monetary terms, the so-called "means test". Basically, if under standards promulgated in that section, abuse is presumed if the debtor's disposable monthly income is high enough to allow him to pay back certain dollar amounts to creditors. If such is the case, the debtor is subject to having the U.S. Trustee file a motion to dismiss the case for substantial abuse. This is one of the key features of the radical change wrought upon the bankruptcy system by BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act) of 2005.

BAPCPA and the Consumer

     BAPCPA made it much for difficult for individual consumer debtors to obtain Chapter 7 relief. Those with higher income levels who do not pass the "means test" are subject to having their cases dismissed for "substantial abuse" of the bankruptcy laws. They are presented with the option of having the case converted to Chapter 11 or 13. The definition of "consumer debt" is a debt incurred primarily for personal, family or household purposes. This is a key in determining whether a case is a business case or a consumer case, and they can have substantially different outcomes.

Consumer vs. Business Debtors

     Perhaps strangely, there is no comparable "means test" provision for debtors whose debts are primarily business, as opposed to consumer, in nature. Obviously, Congress has made a policy decision electing to punish consumer debtors, while at the same time allowing business debtors the same treatment that historically was accorded all Chapter 7 debtors.

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Written by Henry Rendler