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Consumer Debts vs Non-Consumer Debts in Bankruptcy – What Are They and Why Does it Matter?

There are many different types of debts in bankruptcy. Often the difference between whether a debt is secured or unsecured can be the difference between whether a person is able to get rid of that debt in bankruptcy. Another distinction which is particularly important in Chapter 7 Bankruptcy is the distinction between debts that are consumer debts and debts that are non-consumer debts.

Section 101 of the Bankruptcy Code defines consumer debt as “debt incurred by an individual primarily for a personal, family, or household purpose.” For example, a mortgage on a house is typically a consumer debt, whereas a credit card bill for business expenses would not be a consumer debt. Sometimes, though, it can be difficult to determine whether a debt is a consumer debt or not. As discussed below, getting the answer to this question wrong can have important consequences, such as making a debtor unable to file for Chapter 7 Bankruptcy. An experienced Oakland Bankruptcy Attorney with knowledge of California Bankruptcy Law will be able to assist you in analyzing your debts and determining whether they are consumer or non-consumer debts.

Why Does the Distinction Between a Consumer Debt and a Non-Consumer Debt Matter?

Previous posts on this blog have discussed the Chapter 7 means test, a test that determines whether a debtor is eligible to file for Chapter 7 Bankruptcy. The Chapter 7 means test looks at a debtor’s income and compares it to their debts. However, the Bankruptcy court will also look at whether those debts are consumer debts or not. If the debts are primarily not consumer debts, the Chapter 7 means test does not apply and that debtor can file for Chapter 7 Bankruptcy. Courts generally interpret “primarily” to mean more than half, or 51 percent.

What Happens When it is Difficult to Determine Whether a Debt is a Consumer Debt?

Although not precedential for California, a recent decision in Texas helps to illustrate how the difference between consumer and non-consumer debts can be tricky, yet have very important consequences for the filer. The decision revolves around the issue of student loans, which are very difficult to get rid of in bankruptcy. However, student loans can also affect the Chapter 7 means test.

Here is how one dentist was able to circumvent the means test and declare Chapter 7 Bankruptcy:

In the case, a dentist with a great deal of student loans filed for Chapter 7 Bankruptcy, but his income was sufficiently high that the Bankruptcy Trustee argued that he did not pass the Chapter 7 means test and the bankruptcy should be dismissed.

The dentist argued that his student loans were not consumer debts, and that the means test did not apply to him. The Houston judge agreed and held that most of the dentist’s student loans were not consumer debts, but that the portion of the loans used to pay for living expenses was a consumer debt. As such, the Chapter 7 means test did not apply and the dentist could file for bankruptcy. Other jurisdictions hold that student loan are consumer debts, and thus the means test would have applied in those jurisdictions.

Courts in California have held that tax debts are not consumer debts because the connection between the debtor having used the money they should have paid in taxes to pay for consumer goods instead is too tenuous.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code


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