What Is Included in Chapter 7 Non-Consumer Debt?

To qualify for a Chapter 7 bankruptcy, you have to pass a "means test" to demonstrate that your disposable income is not high enough to warrant abuse, which could lead to subsequent dismissal of your case or the conversion of your petition to a Chapter 13 bankruptcy, which would require you to form a debt repayment plan rather than pursue liquidation under Chapter 7. Disposable income is your total income minus expenses, such as living expenses and debt payments.

Consumer Debt

When you file a Chapter 7 bankruptcy, your debt is categorized in one of two ways: consumer debt and non-consumer debt. Consumer debt is debt like credit card debt, financing for furniture or gadgets, car loans and medical expenses. It is debt that is taken on from living expenses, which tends to have higher interest rates, and is incurred through goods or services that depreciate quickly. Having a high amount of consumer debt (over 50 percent of your total debt) can cause your Chapter 7 petition to be denied or converted to a Chapter 13 bankruptcy petition, which would require you to set up a three to five year debt repayment plan.

Non-Consumer Debt

In contrast, non-consumer debt is more durable. It refers to debts like home loans, business investment and debt from rental property investment, as well as personal tax debts and debts incurred while on active military duty. This type of debt points to assets that depreciate far more slowly, that can potentially generate returns or that is taken on involuntarily (e.g. tax debt). In a Chapter 7 bankruptcy, if your total non-consumer debt is greater than 50 percent of your total debt, you can forego the means test entirely.

Usage

The purpose of defining your debt as consumer or non-consumer debt in a Chapter 7 bankruptcy is to determine your eligibility to file Chapter 7 bankruptcy. Aside from the fact that a high amount of consumer debt tends to indicate financial irresponsibility, indicating that you were living outside your means, determining whether a debt is consumer-oriented or not is important with regard to the documentation required to file your Chapter 7 petition. If you have a high amount of consumer debt, for example, you will have to file additional documentation relating to those debts, including a Statement of Current Monthly Income and Means Test Calculation (Form B22A).

Consequences

In addition, a high amount of consumer debt can cause dismissal in a Chapter 7 bankruptcy. This happens when the bankruptcy court rules that your volume of consumer debts, as opposed to the number of consumer debts you hold, is high enough that discharging these debt obligations would indicate abuse under the bankruptcy code. Abuse is generally presumed if your income, above allowed expenses, is higher than $11,725 or 25 percent of your unsecured debt, unless you can demonstrate justifiable cause.