Consumer Debt

Consumer debt is defined as debts incurred for use by an individual for family, household, or personal reasons. Consumer debts are contrasted with business debts, but unfortunately, determining whether a debt is a consumer debt versus a business debt for Chapter 7 bankruptcy purposes may not always be clear-cut.

In 2005 the United States Legislature passed legislation which makes it more difficult for debtors with high income to file Chapter 7 bankruptcy and discharge their debts.

To determine whether a debtor is eligible for Chapter 7 bankruptcy most debtors must now pass a “means test.” An exception exist; however, if the filer’s debts are non-consumer or business debts. In this case, they do not have the pass the means test, but can automatically file Chapter 7 bankruptcy.

Identifying Consumer Debts

So how do you identify non-consumer debts? Identifying debts which are not consumer debts can be a bit difficult because non-consumer debts (business debts) are not clearly defined under bankruptcy law.

Although general rules can be used to determine consumer vs. non-consumer debts, it’s important to consult with a lawyer if you have any questions. General information about debts is listed below.

• Taxes are generally not voluntarily paid and are generally non-consumer debts.
• Credit card expenses for business purposes (i.e., equipment, inventory) are generally non-consumer debts.
• Mortgage debts for business property or investment property are non-consumer debts.
• Car loans for cars used exclusively for business are non-consumer debts.
• Medical bills incurred for non-elective medical procedures may be non-consumer debts.
• Legal fees incurred from business disputes are non-consumer debts.
• Student loan debts are classified differently by different courts.

One critical component of classifying debt correctly is supporting documentation. If you are claiming that your debts are non-consumer debts you need to have information about the purpose of the debt at the time it was incurred and how the funds were spent.

Discharging Consumer debts

Assuming a debtor passes the means test and is allowed to file Chapter 7 bankruptcy, many types of unsecured debts are discharged, including consumer debt. For example, if you have credit card bills or unsecured personal loans and the debt incurred for these obligations was used to make consumer purchases, you would be allowed to discharge these debts (exceptions may exist for luxury purchases for certain amounts made too close to the filing date).

Several types of consumer and non-consumer debts, however, are not discharged. For example, debts which are not dischargeable under Chapter 7 include spousal and child support, student loans (unless you can prove “extreme economic hardship”), recent tax obligations, secured debts, debts not listed in your bankruptcy petition, debts incurred after the bankruptcy filing, debts incurred by fraud, and damages assessed against the debtor in an injury lawsuit resulting from a DUI.