Debts or “claims” (as debts are referred to from a creditor’s perspective) can be classified in bankruptcy as either “consumer” or “non-consumer.” The distinction’s significant in terms of chapter 7 bankruptcy eligibility as well as the level of scrutiny by the United States Trustee  and creditors, parties that may object to dischargeability (cancellation) of debt. But first, what is consumer versus nonconsumer debt?

Chapter 1 of the United States Code Title 11 includes an exhaustive list of definitions commonly used in bankruptcy law. At section 101(8), consumer debt is defined as:

“Debt incurred by an individual primarily for a personal, family, or household purpose.”

The Bankruptcy Code doesn’t explicitly describe “non-consumer debt.”  At best you may infer from the text that non-consumer debt is:

Debt incurred by an individual NOT primarily for a personal, family, or household purpose.

Which isn’t very helpful. Fortunately, we’ve developed a simplified practical definition:  

Non-consumer debts include business/investment debts and tax debts;

Consumer debts= most other debts 

So why does that distinction matter?  

First, if your debts are mostly non-consumer, you’re spared from completing the “means test,” a fairly rigid form (applicable if your income is above median) that may disqualify you from chapter 7 bankruptcy.

having primarily non-consumer debt gets you a fast pass on the bankruptcy means test

“Excess” income can preclude chapter 7 bankruptcy eligibility. That preclusion is effected in part by the means test, a tabulation of income less expense allowances (set by Census Bureau and IRS standards) that figures your “means” to repay debt. If you have the means (i.e. income substantially exceeds allowed expenses), then chapter 7 bankruptcy relief is considered “abusive:” it’s implied you have resources to repay (at least a portion of) your debt (under an alternative chapter 13 payment plan). 

However section 707(b) of the Bankruptcy Code limits application of the means test to 

“….  an individual debtor… whose debts are primarily consumer debts… “

So if your debt is primarily (meaning more than 50%) non-consumer debt, then you can skip the means test calculations (by checking “No”at Part 1 of the related exemption form). 

Primarily-non-consumer bankruptcy cases aren’t very common. Even if you you owe, for example, $200,000 in debt from investments or to the government (and have no regular credit card or medical debt), if you have a single residential mortgage in California, that would likely tip the scale toward majority consumer debt.

Student loan debt is generally also considered consumer, though you might argue that educational loans allocated specifically to a professional/graduate degree are nonconsumer. 

Nature of Debt Affects Objections to Dischargeability

The technical term for debt cancellation in bankruptcy is discharge, but it can be better described as debt forgiveness.

The notion of forgiveness is consistent with a mostly non-judgmental, no-fault approach to the bankruptcy proceedings

Yet, if your consumer debt is exceptionally high (e.g., over six-figure personal credit card debt)–not counting medical or secured debt–then it’s subject to enhanced scrutiny by the United States Trustee , the watchdog which checks into bankruptcy fraud. Per Bankruptcy Code §707(b)(3)(A), the US Trustee might cite “bad faith” as cause to deny discharge.

Bad faith in bankruptcy can relate to reckless borrowing that implies no intent to ever repay. Whereas, debts incurred for nonconsumer purposes are presumed to be more valid and less suspect.  

On the other hand, business debts can attract more scrutiny from small-business creditors (like a mom and pop), who claim greater stake in the matter than an institutional consumer creditor (like a credit card company). A scorned supplier or offended vendor might be motivated to object to the discharge of their claim. In the matter of debt, business is personal to individuals. Of course, hard feelings aren’t enough to merit a legitimate clash by the chagrined claimant: a creditor objecting to discharge must prove specific elements of misrepresentation or fraud, which are addressed at section 523(a)(2) of the bankruptcy code. 

Photo credit: David Edkins