Bankruptcy Can Discharge Business Debts, Means Test Does Not Apply

Often I get clients who have incurred huge amount of debt, over $150,000 in credit card debt, while trying to run their business. Usually these clients are concerned because they have to explain what happened to incur so much debt. the Magic words are “business debt.”

Did you know that the means test, the test which determines if you qualify to file chapter 7 bankruptcy, does not even apply if your debts are mostly business debt? So long as more than 50% of your debt is business debt, you don’t even have to complete the means test.  The means test was introduced by the Bankruptcy Abuse Prevention and Consumer Protection Act to make it more difficult for debtors to file a Chapter 7 Bankruptcy. But its was really targeted to consumers or chapter 7 debtors whose majority of debt was for consumer purchases. So just make sure you let your attorney know that if most of your debt was for business expenses, they are listed as such.

Now in some jurisdictions, mortgages on primary residence are considered consumer debt. Since most debtors may have mortgages that are more than any credit card debt, the above may sound pointless. Not so. Listing the debt properly as business debt on your schedule “F” will get you a long way from the red flags that a  large amount of credit card debt may raise.

At the end of the day, the truth is the best policy you have, just let your bankruptcy attorney know the truth of what you did with the charges. The experienced bankruptcy attorney will prepare the petition in a way to properly document your petition and qualify you for the means test and get you the discharge.