DEBTS IN BANKRUPTCY
is consumer debt?
is defined as “debt incurred by an individual primarily
for personal, family, or
household purpose.” See
is non-consumer debt?
is that which is not consumer
is the difference important?
your debts are primarily
debts, you have to pass the "Median
Income Test" and possibly the "Means
order to qualify for a Chapter
7 bankruptcy. See
your debts are not primarily
consumer debts, then you do not have to pass the Median Income and
Means Test, and additionally, in
districts, do not have to overcome the Chapter 7 “totality of the
circumstances" (excess disposable income) test
as bad faith cause for dismissal. See
also In re Lobera, 2011 WL
941331 (Bankr. N.M.
2011) and In re Aldoph,441 B.R. 909 (Bankr.N.D. 111.2011).
Note: There are other
exceptions to the Means Test as well.
13 bankruptcies, codebtors on a consumer debt are protected by
automatic stay but a nonconsumer
is not protected.
(Reason) for the rule: Why
did Congress distinguish
between the two types of
debts? Congress had
capitalism in mind. They
did not want to
limit Chapter 7 protection for individuals incurring primarily non
business type) debts. They
promote risk taking and starting businesses without fear and to not
those individuals for business debts, taxes, etc.
DISCUSSION - CONSUMER V. NON-CONSUMER DEBTS:
A consumer debt is defined as “debt incurred by an individual primarily for personal, family, or
bankruptcy code does not define the word, “primarily.” However, most
interpreting the term, and define it to mean “mostly,” “for the most
“the majority,” or “more than anything else.”
In the Ninth Circuit
(which includes California
and several other western states), the monetary amount of
must be more than half (more than 50%) of the total debt.
[In re Kelly, 841 F.2d 908,
at 913 (9th Cir. 1988)]
But certain other courts
require that the number of consumer
debts must be also or instead more than half the total number of the
But again, most courts simply
require that more than 50% of the value
of the debtor’s debts to be consumer in nature, not 50% of the number
of debts. In
394 B.R. 441,
447-48 (S.D. Ohio 2008); In re
Beacher, 358 B.R. 917, 920-21 (Bankr. S.D. Tex.
See sample hypothetical case
end of this article.
in many states including California,
if more than 50% of your debt is consumer debt, then you, in general,
with the Means Test. But
exceptions to the rule.
if 50% or less of your debt is not
consumer debt, then you do not have
with the Means Test in a Chapter 7 bankruptcy case.
is non-consumer debt? Simply,
if a debt is not a consumer debt
(that is, not for a personal, family, or household purpose), then it is
non-consumer debt. Generally
debt is that which is incurred for business
debt” is a debt incurred with a “profit motive”, a business purpose, or
investment purpose. But,
types of non-consumer debts that are not
Thus, you have to look at
the purpose of the debt. Is
the debt for a consumer
purpose? Is it for
personal, family or household
purpose? Is it for a business purpose?
only do you look at the purpose of the debt, but you also examine
what the purpose was at the time the
debt was incurred.
typically, a consumer debt may not later be transformed into a
example you may buy a house to live in. You
incur a consumer mortgage debt to purchase the
home residence. That
debt was incurred for a household
purpose, and, therefore, is a consumer
debt. But, what if
later, you move out
of the house and rent the house and as a landlord which would be a
purpose? Do you
identify this as a
consumer or a non-consumer debt in your bankruptcy papers?
Answer: It is a consumer
time when you file the bankruptcy that counts. Rather,
what counts is what type of debt it was at
the time the debt was incurred.
the nature of the debt depends on why you incurred the debt for in the first place, that is, at the
time the debt was incurred. What
was the original purpose of the debt?
It is the purpose of the
debt at the time the
debt was incurred, not at the time you file bankruptcy that is
SPECIFIC TYPES OF DEBT:
Consumer Debt Mortgage:
A loan to purchase personal
residence (purchase money
security) is consumer in nature. Further,
a loan used for home improvements regarding the residence where you
live is a consumer
Non-Consumer Debt Mortgage:
But a mortgage, refinance,
or home equity loan used to fund a business may be characterized as
Domestic Support Orders:
The weight of the case law on
this issue reveals
support orders (child support, spousal support and alimony debts) as
debt” due to a non-profit motive. In re Stewart, 175 F.3d
796, at 807(10th Cir. 1999). See
re Kestell, 99 F.3d 146, 149 (4th Cir.1996).
tax debts are not
consumer debts. In
215 F.3d 589 (6th Cir. 2000).
Why are taxes
while consumer debts are incurred voluntarily, taxes are
imposed involuntarily. Further,
debts are incurred for personal and household purposes, taxes are
the public wealth. Finally,
consumer debts result from consumption, taxes arise from earning money.
re Brashers, 216
N.D. Okla. 1998)
"income tax liability is simply not a
consumer debt because it is not incurred in the course of a consumptive
activity") See In re Gault, 136
736, 738 (Bankr. E.D. Tenn. 1991) See
also In re Goldsby), 135 B.R. 611,
613 (Bankr. E.D. Ark. 1992) (section 1301 case) (citing extensive
that "federal income taxes do not constitute a consumer debt") Also, in In
re Traub, 140 B.R. 286, 288 (Bankr. D. N.M. 1992), the court
taxes do not qualify as consumer debts for the purposes of section
Senate Report 95-989 notes the definition of "consumer debt" in
section 101 "is adapted from the definition used in various consumer
laws [which] encompasses only a debt incurred by an individual
primarily for a
personal, family, or household purpose." See S. Rep. No. 989, 95th
2d Sess. 1978, 1978 U.S.C.C.A.N. 5787, 1978 WL 8531. Cases interpreting
"various consumer protection laws" have excluded taxes from their
scope. See Staub v. Harris, 626
275, 277-78 (3d Cir. 1980) (per capita tax was not a "debt" under the
Fair Debt Collections Practices Act); Beggs
v. Rossi, 994 F. Supp. 114, 116-17 (D. Conn. 1997), aff'd,
511 (2d Cir. 1998) (personal property taxes assessed on motor vehicles
"debts" under the Consumer Credit Protection Act).
see a different result per In re
B.R. 368, 372-73 (Bankr. M.D. Fla. 1995) – where the debtors defaulted
home mortgage loan, which was forgiven by the lender. Consequently,
the debtors incurred tax
liability for the forgiveness of the debt. The Gentri
court treated the tax liability as a consumer debt
because, absent the triggering event (the forgiveness of the loan), the
would have been consumer in nature. Because the nexus between the
consumer loan and the resulting tax debt was so clear and direct, the Gentri court held that the tax retained
the same character as the original loan.
Personal Injury and Tort Debts:
from torts (examples: negligence, automobile accident, assault,
battery, etc.) not consumer debts.
Courts distinguish consumer debts from
non-consumer tort debts on the basis that consumer debts are voluntarily incurred for family,
household and personal purposes while tort debts are not.
re White, 49
(Bankr. W.D.N.C., 1985).
Student Loans –
Courts are divided.
courts, like the court
in In re Gentri, 185 B.R. 368, 373
(Bankr. M.D. Fla. 1995), assume that student loans are consumer debts,
not analyze, whether student loans are "consumer debts." See
In re Dickerson, 193 B.R. 67,
M.D. Fla. 1996); In re Chapman, 146
B.R. 411, 416 (Bankr. N.D. Ill.
courts have held
that student loans may or may not be "consumer debts." See
re Vianese, 192 B.R. 61, 68 (Bankr.
N.D.N.Y. 1996) which held that student loans for debtor's son's
for "family purposes" and should be considered consumer debt).
most logical view is to examine
the student loan’s
purpose: Student loans may be either consumer or non
consumer debts, or
both, depending on the purpose. For
example, if the debt was used to pay for living expenses, then it is
debt. But if the
debt was used, for
example, direct professional education expenses such as tuition and
would be non consumer debt. But
student loan was used for both purposes, it could be both consumer debt
partially and non consumer debt partially. In
re Stewart, 175
F.3d 796 (10th Cir. 1999); In
Rucker Case No. 10-53880-JDW
(Bankr. MD Georgia 2011).
Personal Credit Card:
Credit card debt is not consumer
debt when used for business or non-consumer
Court in the case of In re Traub, 140 B.R. 286
that, on the debtor’s use of a credit card solely for business was a
or non-consumer debt.
see In re Berndt, 127 B.R. 222 (Bankr. D.
N.D. 1991): The use of overdraft line and credit cards for “dabbling”
stock market was considered by that court to be consumer debt.
Credit card debt is consumer
debt when credit cards are used for consumer
one court has determined that gambling debts, for purposes of § 707(b),
considered consumer debts. In
192 B.R. 61, 68 (Bankr. N.D. N.Y. 1996).
Calculating the amount:
a defaulted business lease, one court
held that the entire amount counts as a business debt even though the
mitigation may reduce the amount. In re
B.R. 457 (Bankr. S.D.Ohio
Debts incurred for necessary
medical care are arguably non-consumer debt (But courts have ruled both ways on this issue).
courts probably view medical bills as consumer debts, arguably, medical
bills incurred for necessary medical care are non-consumer debts because, while consumer debts are incurred
voluntarily, necessary medical bills are imposed involuntarily. Nobody
contracts cancer voluntarily, and, thus, medical treatment for same is not
voluntary but necessary. It is prescriptive and not consumptive.
Ebola related medical care is not just personal but also for the public
good. Emergency medical care due to a traffic collision injury is also
not voluntary. See analogous tax debt and tort debt rationales above in this
article. Of course, plastic surgery primary for vanity reasons would be a
distinguishable due to being voluntary and not necessary. But plastic
surgery for an actress is arguably a non-consumer business debt involving her
John Doe's debts:
Taxes – personal
TOTAL NON-CONSUMER DEBT:
Loan to purchase house Consumer
Car loan –
the above example, 50% or more of the debt is non-consumer debt,
therefore, in most federal districts, the debtor’s debts would be
considered and characterized as
non-consumer debt (i.e. not
primarily consumer debt), and the debtor would not
have to pass the Means Test in order to qualify to file a Chapter 7
seek professional legal
advice regarding consumer versus non-consumer debt and its
ramifications. The issues and laws related
to this article (and
bankruptcy in general) are complex. This
above is a simplified explanation. Different
courts view the debts differently as to
characterization as to
whether consumer or non-consumer debts and application thereof
to the Means Test and totality of the circumstances test. Further Disclaimer