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What is consumer debt? 

Consumer debt is defined as “debt incurred by an individual primarily for personal, family, or household purpose.”  See 11 U.S.C. 707(b).

What is non-consumer debt? 

Non-consumer debt is that which is not consumer debt.

Why is the difference important?

If your debts are primarily consumer debts, you have to pass the "Median Income Test" and possibly the "Means Test" in order to qualify for a Chapter 7 bankruptcy.  See 11 U.S.C. 707(b)(2).

But if your debts are not primarily consumer debts, then you do not have to pass the Median Income and Means Test, and additionally, in certain districts, do not have to overcome the Chapter 7 “totality of the circumstances" (excess disposable income) test as bad faith cause for dismissal.  See 11 U.S.C. 707(b)(3)(B).  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.

In Chapter 13 bankruptcies, codebtors on a consumer debt are protected by the automatic stay but a nonconsumer debt is not protected.

Rationale (Reason) for the rule: Why did Congress distinguish between the two types of debts?  Congress had free market capitalism in mind.  They did not want to limit Chapter 7 protection for individuals incurring primarily non consumer (including business type) debts.  They wanted to promote risk taking and starting businesses without fear and to not penalize those individuals for business debts, taxes, etc.


Consumer Debts: A consumer debt is defined as “debt incurred by an individual primarily for personal, family, or household purpose.”

Primarily: The bankruptcy code does not define the word, “primarily.” However, most courts interpreting the term, and define it to mean “mostly,” “for the most part,” “the majority,” or “more than anything else.” 

In the Ninth Circuit (which includes California and several other western states), the monetary amount of consumer debts 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 total debts. 

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 re Hlavin, 394 B.R. 441, 447-48 (S.D. Ohio 2008); In re Beacher, 358 B.R. 917, 920-21 (Bankr. S.D. Tex. 2007).

See sample hypothetical case near the end of this article.

Therefore, in many states including California, if more than 50% of your debt is consumer debt, then you, in general, must deal with the Means Test.  But there are exceptions to the rule.

But, if 50% or less of your debt is not consumer debt, then you do not have to deal with the Means Test in a Chapter 7 bankruptcy case.

Non-Consumer Debts: What 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 non-consumer debt is that which is incurred for business purposes.  “Business debt” is a debt incurred with a “profit motive”, a business purpose, or investment purpose.  But, there are types of non-consumer debts that are not a business debt.

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?

When incurred: Not 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. 

Thus, typically, a consumer debt may not later be transformed into a non-consumer debt. 

For 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 business purpose?  Do you identify this as a consumer or a non-consumer debt in your bankruptcy papers?  Answer: It is a consumer debt because it not the 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. 

Therefore, 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 determinative.



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 debt.

Non-Consumer Debt Mortgage:

But a mortgage, refinance, or home equity loan used to fund a business may be characterized as non-consumer.

Domestic Support Orders:  

The weight of the case law on this issue reveals support orders (child support, spousal support and alimony debts) as “consumer debt” due to a non-profit motive. In re Stewart, 175 F.3d 796, at 807(10th Cir. 1999).   See also In re Kestell, 99 F.3d 146, 149 (4th Cir.1996).

Tax Debts:

Personal income tax debts are not consumer debts.  In re Westberry 215 F.3d 589 (6th Cir. 2000). 

Why are taxes non-consumer debts? Because, while consumer debts are incurred voluntarily, taxes are imposed involuntarily.  Further, while consumer debts are incurred for personal and household purposes, taxes are assessed for the public wealth.  Finally, while consumer debts result from consumption, taxes arise from earning money. See also In re Brashers, 216 B.R. 59 (Bankr. N.D. Okla. 1998)

Further, "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 B.R. 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 authority 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 held income taxes do not qualify as consumer debts for the purposes of section 707(b). Senate Report 95-989 notes the definition of "consumer debt" in section 101 "is adapted from the definition used in various consumer protection laws [which] encompasses only a debt incurred by an individual primarily for a personal, family, or household purpose." See S. Rep. No. 989, 95th Cong., 2d Sess. 1978, 1978 U.S.C.C.A.N. 5787, 1978 WL 8531. Cases interpreting the "various consumer protection laws" have excluded taxes from their scope. See Staub v. Harris, 626 F.2d 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, 145 F.3d 511 (2d Cir. 1998) (personal property taxes assessed on motor vehicles were not "debts" under the Consumer Credit Protection Act).

BUT see a different result per In re Gentri, 185 B.R. 368, 372-73 (Bankr. M.D. Fla. 1995) – where the debtors defaulted on their 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 debt would have been consumer in nature. Because the nexus between the underlying 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:

Debts resulting from torts (examples: negligence, automobile accident, assault, battery, etc.) not consumer debts.

Reason: The 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.  In re Marshalek, 158 B.R. 704 (Bankr. N.D. Ohio 1993; In re White, 49 B.R. 809, (Bankr. W.D.N.C., 1985).

Student Loans – Courts are divided.  

Some 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, but do not analyze, whether student loans are "consumer debts." See In re Dickerson, 193 B.R. 67, 70 (Bankr. M.D. Fla. 1996); In re Chapman, 146 B.R. 411, 416 (Bankr. N.D. Ill. 1992).

But other courts have held that student loans may or may not be "consumer debts."  See In re Vianese, 192 B.R. 61, 68 (Bankr. N.D.N.Y. 1996) which held that student loans for debtor's son's education were for "family purposes" and should be considered consumer debt).

The most logical view is to examine the student loan’s purpose: Student loans may be either consumer or non consumer debts, or partly both, depending on the purpose.  For example, if the debt was used to pay for living expenses, then it is consumer debt.  But if the debt was used, for example, direct professional education expenses such as tuition and books, it would be non consumer debt.  But if the 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 purposes: The Court in the case of In re Traub, 140 B.R. 286 (Bkrtcy.D.N.M.,1992) held that, on the debtor’s use of a credit card solely for business was a business or non-consumer debt.

But, see In re Berndt, 127 B.R. 222 (Bankr. D. N.D. 1991): The use of overdraft line and credit cards for “dabbling” in the stock market was considered by that court to be consumer debt.

Credit card debt is consumer debt when credit cards are used for consumer purposes.

Gambling Debts: 

At least one court has determined that gambling debts, for purposes of 707(b), are considered consumer debts. In re Vianese, 192 B.R. 61, 68 (Bankr. N.D. N.Y. 1996). 

Business Lease - Calculating the amount: 

Regarding a defaulted business lease, one court held that the entire amount counts as a business debt even though the future mitigation may reduce the amount. In re Mohr, 425 B.R. 457 (Bankr. S.D.Ohio 2010).

Medical Bills:

Debts incurred for necessary medical care are arguably non-consumer debt (But courts have ruled both ways on this issue). 

While most 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 livelihood.


Debtor John Doe's debts:

Debt Type:                        Consumer or NonConsumer:                Amount:

Taxes – personal                          Non-Consumer                                                   $150,000

Business Loans
guaranteed by Debtor
                 Non-Consumer                                                   $275,000

Necessary Medical bills               Non-Consumer                                                     $50,000

                                                                TOTAL NON-CONSUMER DEBT:         $475,000

Home Loan to purchase house   Consumer                                                            $300,000

Personal credit card                     Consumer                                                            $100,000  

Car loan – personal                       Consumer                                                             $20,000

Child support                                  Consumer                                                             $50,000

                                                                           TOTAL CONSUMER DEBT:       $470,000

In the above example, 50% or more of the debt is non-consumer debt, and, 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 bankruptcy.



Always 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


Author: Attorney Matthew B. Tozer
Copyright 2011

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