Living in today’s world is an expensive proposition. It seems there are frequent news stories about increases in the cost of food, housing, and medical care that far outpace the average person’s earnings. Unfortunately, many of the rising costs are for necessities that cannot be avoided, and if a person suffers a major accident or loses a job, financial disaster can easily follow. Bankruptcy is a legal option that offers individuals and businesses the ability to reduce or eliminate debt they cannot afford to pay.

Chapter 7 is the kind of bankruptcy most familiar and most chosen by individuals, as it permits the debtor to completely discharge or erase many kinds of debt. This debt relief is important for those facing financial obligations that far exceed income or other financial resources, but the law limits Chapter 7 discharge to particular types of debts. Thus, it is important to evaluate, before filing for bankruptcy, where most of a person’s financial liabilities lie. Properly classifying debt is key to the bankruptcy process, and has a large influence on the outcome of a petition. A woman seeking to discharge her student loans recently learned the importance of such categorizations when a federal court dismissed her Chapter 7 bankruptcy case related to her attempt to classify student loans as non-consumer debt. A discussion of why the distinction of debt as consumer vs. non-consumer is so crucial and the types of debt generally dischargeable in Chapter 7 cases will follow below.     

Consumer vs. Non-Consumer Debt

The reason why determining whether a debt is consumer or non-consumer has to do with passing the means test used in Chapter 7 cases. The means test is essentially an income analysis designed to calculate if the debtor makes too much money to qualify for Chapter 7 debt relief. This test is used if the debtor’s overdue obligations are primarily consumer-based. Thus, if the debts are mainly non-consumer, the means test is not necessary, and the Chapter 7 case can proceed. Courts require the means test if a debtor has more than half of his/her debt from consumer sources. If the debtor fails the means test, he/she must file a Chapter 13 bankruptcy petition, which requires the debtor repay some portion of the money owed to creditors. Consequently, Chapter 7 is preferred if available.

The definition of “consumer debt” is debt which is principally used for household, family, or personal purposes. This definition leaves a lot open to interpretation, but the easiest way to figure out if a debt was consumer or not is to look at how it was used by the debtor. If the money was used to pay for personal, family, or household expenses or to purchase items for personal, family, or household use, it is likely consumer debt.

Non-consumer debt is everything else, and usually comes in the form of business obligations. Some examples of non-consumer debt includes:

• Taxes;
• Medical bills;
• Mortgages on business property;
• Credit card purchases for business purposes.

Types of Debt Dischargeable Under Chapter 7

The Bankruptcy Code lists 19 types of debt that are not dischargeable in a Chapter 7 case, with student loans being the most widely known type. All other debts may be discharged, although discharge is not an absolute right, and may be denied by the court if the debtor fails to follow bankruptcy procedure or presents misleading information. Generally, though, the following types of debt will be discharged:

• Credit card charges (unless for luxury goods valued at over $650 within 90 days of the bankruptcy petition);
• Medical bills;
• Collection agency fees;
• Past due utility bills;
• Business debt; and
• Past due rent.

Talk to a Bankruptcy Attorney
Do not suffer the mountains of bills and incessant collection agency calls in silence. Contact a bankruptcy attorney who can let you know if bankruptcy is right for you. Filing for bankruptcy will stop the collection calls, and halt any court cases against you for unpaid debt. Christopher L. Arrington helps clients everyday with bankruptcy matters and is available to take your case. Contact him to schedule an appointment.