Chapter 7 Debtors – is your debt primarily consumer or non-consumer and why should you care?

Written by: leonora  |  Published on: January 20th, 2010  |  Category: Blog

This is why you should care and why you want (if possible) to have your debts qualified as primarily non-consumer in Chapter 7:

  1. You can avoid having to qualify under the Means Test. This is especially important for debtors whose income exceeds state median income for the size of their household.
  2. If your debts are primarily non-consumer, Trustee, Creditors or US Trustee will not be able to request (successfully) dismissal for abuse under 11 U.S.C §707(b).


11 U.S.C §101(8) – defines “consumer debt” to mean “debt incurred by an individual primarily for personal, family or household purpose.”

Simple enough? Not really, not according to cases all over the place on the issue.

Issues to consider (because courts have):

-         What does primarily mean, total amount of debt or the number of debts?

-         Do you count mortgage in making the calculation?

-         What about debt in name of individual, incurred for business purposes?

-         What about deficiency judgments? What if 1099 is issued “excusing” the debt?

-         What about judgments and involuntary debts?

Calculating of claims has to be done in good faith and be reasonable

In re Reavis 2007 WL 2219519 (Bankr. N.D. Okla., July 30, 2007), held that Creditor is not permitted to manipulate the amount of claim in order to put debtor within parameters of §707(b). Likewise, I would infer from the holding that Debtor cannot manipulate debts in order to avoid §707(b) considerations.

While there is no case law to confirm my assumption, I think debt barred by statute of limitation or state law (such as anti-dificiency statute) cannot be considered in making the calculations whether debt is primarily consumer or not.

Determination of whether debt is primarily consumer should be based on dollar amount and not the number of debts in each category.

Majority rule: it is the aggregate amount of debt not the number of debts that should decide whether debts are primarily consumer or non-consumer.

See In re Hlavin, 394 B.R. 441 (Bankr. S.D. Ohio, Sept. 30, 2008); In re Booth, 858 F. 2d 1051 (5th Cir. 1988).

Courts do consider mortgages, despite secured status, in determining whether debt is primarily consumer or not. However, mortgage on home is not automatically consumer, rather use of money should be examined. See In re Jones, 2009 WL 102442 (Bankr. E.D.N.C., Jan. 12, 2009).

See In re Hlavin, 394 B.R. 441, which holds that when Debtor’s concede that mortgage was used for consumer purposes, debt is considered consumer, despite secured status. This applies to debt secured by debtor’s home, not rental properties.

The Court in In re Burge, 377 B.R. (Bankr. N. D. Ohio, Oct. 3, 2007), held that debt arising from foreclosure on rental properties is not consumer debt. In other words, if mortgage secures rental property, I would argue that debt is primarily non-consumer.

However, consider that even debt on rental properties can be considered consumer, if on several occasions debtor represented to lender that property was to be occupied by debtor as her residence. See In re Coppi, 2008 WL 4224834 (Bankr. D. Neb., Sept. 10, 2008).

Unanswered issue: What about debts that are barred from collection through statute or state law?

This still leave unanswered the question re. whether deficiency judgment is in fact collectible. What if Creditor is barred from collecting on the debt, after issuance of 1099-C, can Debtor include that debt? No cases appear to clearly answer this question, but I would probably infer that you cannot include debt that is barred from collection in determining whether your debts are primarily non-consumer.

Most debts that are result of car accidents are non-consumer based on §101(8) definition of consumer debt.


Courts should examine the nature of debt, rather than qualification as personal or business debt.

In re Jones, 2009 WL 102442 (Bankr. E.D.N.C., Jan. 12, 2009) held that debts attributable to a failed business should be considered non-consumer, despite the fact that debts were in the debtors’ names rather than the business name.

In conclusion, while it is sometimes difficult to determine whether you are a consumer or non-consumer debtor, knowing that these issues are out there will at least give you the tools to ask your attorney the right questions.


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