How You Can Help Some Clients Avoid the Bankruptcy Means Test
Your client comes in and fails both the initial level and the second level of the Bankruptcy Means Test. The presumption of bad faith is there. What do you do? Maybe you do not have to do anything. Maybe the bankruptcy means test does not apply to your client.
While most consumers have to go through the bankruptcy means test, there are several possible ways to get around it. I am only going to write about one of them today. That is consumer versus non-consumer debt.
If you can show that more than 50% of the debt is not consumer debt, the client does not have to do the bankruptcy means test.
Sadly, many bankruptcy attorneys do not see or use this tool. They see that the second level is breached by the client and there is no change in their income. Based on that, the bankruptcy attorney puts the client into a Chapter 13 for the next 5 years. That can cost the client thousands of dollars. It can easily cost the client hundreds of thousands of dollars and at least 5 years of bad credit.
Think about it. What happens if the Client gets a second opinion from another bankruptcy attorney? What are you going to do when the bankruptcy attorney explains to your client that the bankruptcy means test did not apply to them? What happens when the bankruptcy attorney tells the client that they did not have to file a Chapter 13 bankruptcy reorganization at all and could have filed a Chapter 7 bankruptcy? How are they going to feel towards you when they could have saved all that money for the kids college fund? Do you have your errors and omissions policy current?
What is “non-consumer debt” for avoiding the Bankruptcy Means Test?
Often attorneys think of this as “business debts” versus “personal debts.” There are lots of articles that say that is the case on the internet. They are simply wrong. Non-consumer debts go far beyond just business debts.
Here are 11 examples of non-consumer debts that can help your client avoid having to do the bankruptcy means test would be:
- Taxes of any type. Clients do not go out and “buy” taxes for their own personal use;
- Personal credit cards to the extent they were for expenses with the intent to use the cards for monetary gain such as business expenses on a personal card. If you have a credit card with $5,000 debt but used $3,000 for paying taxes or for business expenses you then have $3,000 for non-consumer debt and $2,000 consumer debt;
- One of the most common ones is a mortgage taken out to put into a business or to pay taxes. This is not just second mortgages. This can be a refinanced first mortgage where a portion is used for non-consumer expenses. That can be pro-rated between consumer and non-consumer debt;
- Believe it or not, even a student loan can be a non-consumer debt. If the student loan was for a trade school, medical school or even a law school, it may be included as a non-consumer debt. That is because the student loan was for the purpose of to be able to earn money or to increase income. An MBA can also be a non-consumer debt;
- Personal injury and/or property damages from a motor vehicle accident or any other unintentional injury;
- Possibly even medical bills for injury or illness that were necessary for the health of the Client. No, that does not include a tummy tuck or face lift as those are debts the client did not have to do. Some courts have that this is not a consumer debt. However, some do not. That depends on the Circuit courts or the bankruptcy Judges. You need to know what decisions are for or against this in your Bankruptcy Court Circuit or District;
- Personal guarantees on business debts including co-signing for a loan a relative is taking it to start or run a business. As long as the relative has agreed to pay the client back with interest or other balloon payment in excess of the amount loaned, the loan is non-consumer.
- The full business lease obligation to the end of the contract. Not just lease arrearages. This can be huge enough to offset many consumer mortgages
- Franchise fees.
- Money borrowed from relatives to help set up or run a business. This is a debt that the client often hides from the Bankruptcy Attorney, the Bankruptcy Trustee and the Bankruptcy Court. It is a common problem. However, they can be found out, if you dig hard enough and explain the law to the client.
Finally, if your client still fails the Bankruptcy Means Test but only by a small amount, perhaps the client can pay enough consumer debt to reduce the amount to where the non-consumer debt is more than the consumer debt. That way your Client can qualify and avoid the Bankruptcy Means Test
Final Thoughts On Avoiding The Bankruptcy Means Test
Keep in mind that every debt that moves from consumer debt to non-consumer debt gets double the value. For example, a $10,000 debt moves from Consumer debt to non-consumer debt. That change reduces the consumer debt by $10,000. It also increases the non-consumer debt $10,000. That means you just improved the whole consumer verses non-consumer debt analysis $20,000 in your client’s favor.
I hope this is useful to you and increases your knowledge to help your client avoid the Bankruptcy Means Test.