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Consumer Debt vs Non-Consumer Debt

consumer debt

Those struggling with debt often file for Chapter 7 bankruptcy. When they make this decision, they must fill out and complete a bankruptcy means form test. This test determines whether or not the debtor is trying to take advantage of Chapter 7 when they actually qualify for Chapter 13 bankruptcy, which involves a payment plan rather than liquidation. In these cases, it is a good idea to determine whether the majority of your debts are consumer debts or non-consumer debts.

At O’Bryan Law Offices, our extensive experience handling a wide range of bankruptcy cases throughout Kentucky and Indiana gives us the tools necessary to manage your case. If you or someone you know is struggling with their debts, we can help. Not only do we cover a wide array of bankruptcy issues and cases, we also offer free consultations. To schedule your complimentary consultation, please contact our office at 502-339-0222 today.

What is Consumer Debt in Bankruptcy?

Before filing for Chapter 7, you must first pass the means test. This test is essentially a complex calculation which determines your eligibility for filing Chapter 7. It includes factors such as household size and income. However, it primarily takes consumer debt into account. But what is consumer debt? The U.S. Bankruptcy Code defines it as “debt incurred by an individual primarily for a personal, family, or household purpose.” Further, if your debts consist of mostly (more than 50%) non-consumer (business) debts, it is not necessary to take the means test. Below, we include examples of consumer debt.

  • Sometimes, courts count student loans as consumer debt. Sometimes not. Speak with your Kentucky bankruptcy attorney and gather documentation to prove what you used your loans for.
  • Credit card debt becomes trickier, as you could use the same card for multiple purposes. More than likely, you’ll have to sift through your statements and determine the status of each individual purchase.
  • Mortgages on your home are strictly consumer debt.
  • Car loans for family or personal use vehicles are consumer debt.
  • Medical debt for elective cosmetic surgeries is considered consumer debt.
  • Domestic support obligations.
  • Legal fees for family or household purposes, like child custody, divorce, or support obligations.

What Debt is Not Covered by Bankruptcy?

Certain types of debts do not receive coverage in a bankruptcy case. We call this “non-dischargeable debt.” The goal in bankruptcy is to receive a discharge of your debts, which means that you are no longer responsible for those debts. Several categories of non-dischargeable debt exist. When you receive your discharge, if you still have these debts, your creditors will continue to try collecting on them.

Below, we list non-dischargeable debts that many people struggle with:

  • Any debts that you left off of your petition for bankruptcy, unless the creditors know about them.
  • Taxes
  • Child support or alimony payments
  • Fines owed to government agencies
  • Student loans
  • Personal injury debts
  • Debts from tax-advantaged retirement plans
  • Co-op or condo fee debts
  • Attorney fees for family law cases
  • Criminal fines or penalties

Other non-dischargeable debts exist. However, they require one of your creditors to successfully challenge a certain discharge during your bankruptcy. After they present the challenge, the court holds a hearing. This hearing allows both you, the filer, and the creditor to present arguments. If your creditor fails to object, or if the court simply disagrees with their objection, they will discharge your debt. 

What is Non-Consumer Debt?

Another term for these is “business debts.” These debts are basically business-related debts, as the name suggests. They encompass everything that “consumer debt” does not. It is important to keep in mind that the date on which you purchased an item usually helps to determine what type of debt it is. For example, maybe you purchased an expensive computer for personal use. Later, you used that same computer for business-related purposes. Because of the intent behind the original purchase, that computer is still a consumer debt.

Below, we include examples of non-consumer debt:

The distinction between consumer and non-consumer debts matters greatly in a Chapter 7 case. When you take the means test to determine eligibility for Chapter 7, you must determine what category each of your debts falls under. If over 50% of your debts count as non-consumer debts, it is not necessary to take or pass the means test to file for Chapter 7. However, if 50% of your debts are consumer debts, you must pass it. 

What Does “Primarily” Consumer Debt Mean?

Bankruptcy law tells us that taking or passing the means test only applies to those individuals who primarily have consumer debts. Courts hold that this means that at least half of the debts must be consumer. If this is the case, you must take the means test.

  • Many courts abide by a dollar amount standard. Basically, if more than half of the monetary amount of your debt is non-consumer, you do not have to take the means test.
  • Some courts, but not most, also consider the total number of different debts. Specifically, they require that you have more non-consumer debts in terms of number than consumer debts in order to qualify.

How Does Consumer Debt Affect Chapter 7?

Time for a recap. If your debts are classified primarily as consumer debts, you must pass the means test to qualify for Chapter 7. Non-consumer debts, however, do not have this same requirement. Bankruptcy courts interpret “primarily” to mean “more than half.” Many debtors have residential home mortgages. These mortgages often make up most of their debts, and thus most of their debts are consumer-related.

Contact O’Bryan Law Offices Today for All Your Bankruptcy Needs

Life is unpredictable. One day your finances are completely in order, and the next you’re deeply in debt. While it sounds scary at first, bankruptcy is a perfectly viable option for sorting out your finances. Filing for either Chapter 7 or Chapter 13 bankruptcy is a choice that we help many people make in Kentucky. Our experienced attorneys at O’Bryan Law Offices will help you develop a plan, execute that plan, and emerge from the other side with less headache than before. To schedule a free consultation with one of our attorneys, please call 502-339-0222 today.


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