Individuals looking to file for relief under the Bankruptcy code will normally be subject to the "means test". The means test is a six month look-back of all income earned by the household in the period right before filing bankruptcy.
This definition of income is broad. It will not only include salaried income, overtime, commissions, and bonuses, but it will include one time payments such as lottery winnings and inheritances. It will include unemployment compensation, and it will even include money that is not taxable, such child support. This broadly defined income will be compared against household size, and if your income is above the threshold, you may be required to repay your creditors in a Chapter 13 bankruptcy. For a household of one, the threshold is about $25,000 in gross income over the previous six months. The threshold increases with household size.
The means test is very important, as the result can lead to thousands of dollars of repayments if it is failed. In the vast majority of bankruptcy filings it applies and must be completed. The vast majority of cases... but not all.
The means test does not apply when the majority of your debts are business in nature, not consumer. 11 United States Code 707(b) says the means test only applies when, "debts are primarily consumer debts." So, if you your debts are primarily from a failed business, the look-period on your income described above does not apply. This is obviously very important if your income is potentially above the threshold. You may be able to avoid filing a Chapter 13 bankruptcy.
So, when are debts primarily business? Is it the number of debts, or the dollar amount? Most courts hold that the dollar amounts of your debts is the determinant amount, and this makes sense. A handful of credit cards in the thousands with a single massive business debt in the hundreds of thousands could hardly be described as "primarily consumer" in nature. Still, it is advisable to consult an experienced bankruptcy attorney with debts of a mixed business and consumer nature, or when the amounts could be in dispute. Generally, if the debt was used to pay primarily personal, family, or household debt, it is consumer, and you will be subject to the means test.
What kind of proof will you need that your debts are primarily non-consumer? The statements themselves will often make it clear, especially if they show the purchase of business assets. The Court may want to see original paperwork related to loans from banks, so you may want to gather that information. Proof of other business statements, such as LLCs and operating agreements can also show that the debts were incurred while in business, for the benefit of the business. Any proof you can provide that show non-consumer intent will be helpful in your bankruptcy case.
Contact us if you have significant business debt. The Bankruptcy Code can be used to your advantage to eliminate these debts and give you a fresh start. We will be happy to discuss your situation in a free consultation. Don't let old business debts drag down your future.