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Does the Means Test Apply in a Business Bankruptcy?

Jun 15, 2020 - Bankruptcy by

If your business has been struggling and you have considered seeking help in a bankruptcy, you may wonder whether the Means Test would apply to your case. The short answer is “No.”

What is the Means Test?

It was added to the Bankruptcy Code in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act, mostly at the behest of credit card companies and their lobbyists. It is found in the Bankruptcy Code at 11 U.S.C. § 707. Its purpose is to force debtors who can afford to pay their creditors something that Congress deems meaningful to file Chapter 13 (consumer reorganization) bankruptcies rather than a Chapter 7 (liquidation). Its intended purpose is carried out by threatening to dismiss Chapter 7 cases that are deemed to be an abuse of Chapter 7 relief if those cases are not “voluntarily” converted it to a Chapter 13 (or Chapter 11 if the debts exceed the debt limits for Chapter 13.) By its terms (see, § 707(b)(1)), it only applies to a case filed by an individual debtor under Chapter 7 “whose debts are primarily consumer debts.” “Consumer debt” is defined at 11 U.S.C. § 101(8) to mean “debts incurred by an individual primarily for a personal, family or household purpose.”

Thus, if you are an individual who is considering filing a Chapter 7 case and the majority of your debts arise from a business purpose (such as a guaranty agreement, taxes, credit card charges used in a business, a second mortgage on a home as collateral for a business loan, etc.), you will not need to worry about completing or passing the Means Test.

If you have questions regarding a potential bankruptcy, or are ready to file, contact Tom Gilman at 316.267.2000.

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