Means Testing and Business Debts
The new bankruptcy law imposes a "means test" to determine if certain debtors are eligible to file Chapter 7 bankruptcy. Only debtors who, according to the means test formula, lack the ability to repay substantial portion of their debts may file Chapter 7.
Most people do not yet understand that the means test applies only to consumers. Consumers for bankruptcy purposes are people whose debts are primarily consumer related. People who incur most of their debts from business are not subject to the means test, and they may file for Chapter 7 without application of the means test formula. People who find themselves insolvent because they borrowed money on credit cards to support a business or an investment, or people who seek bankruptcy protection from personal liability on business related debt can file Chapter 7 under the new bankruptcy law regardless of means test standards.
posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida
Will this rule regarding Chapter 7 apply when the money was borrowed for the business but using personal credit?
Dear Mr. Alper:
I was wondering if you could me out with the following question in connection with this post.
I have an unmarried 25 year old client who lives with his parents. He has some credit card debt, but he wants to file Chapter 7 mainly because he purchased a condominium in 2006 that he believes is now worth only $200,000, with a 1st mortgage of $534,700, a 2nd mortgage of $148,153, and condominium maintenance arrears of $28,500. He has never resided in this condominium nor claimed it as his homestead. He wants to surrender this condominium and discharge all the debt for same, including the large deficiency. The 2nd lender obtained a default judgment on their note and the 1st mortgage foreclosure action is pending. The condominium association should be filing suit soon.
Do you believe that the purchase of this residential condominium unit for investment purposes is sufficient to make this a business case so that the debtor does not have to complete the means test? The unit was never actually leased and title was taken individually, not under an entity. Is the initial loan application relevant (i.e. primary vs second home vs investment) or does the trustee not inquire into that? I know in these cases, the non-consumer debt (i.e. the mortgages on the investment property, etc.) must exceed the consumer debt (credit cards, cars, mortgages on home, etc.), but I thought more is required than just the typical purchase of a condo for investment, despite the definition of “consumer debt” in 11 USC 101(8).
His CMI is over the state median by $340. However, even when taking a deduction of $469.75 in line 42 of Form 22A for his financed car which he will retain and reaffirm, and taking the other deductions, he does not pass the means test. Instead of filing as a business case, could he deduct the 1st and 2nd condo mortgage payments and the condominium assessments in line 42 to pass the means test as a consumer case?
I am aware of the line of Southern District cases of In re Benedetti, In re Parada, In re Castillo and In re Foster that say you can deduct these “amounts scheduled as contractually due to secured creditors” for purposes of the means test calculations, even if the debtor will surrender the condominium and will not actually make the payments. My concern is that has never resided in this condominium. It appears that in those cases, the debtors resided in the property or had done so at some point. Furthermore, even if the deductions are allowed for purposes of the means test calculations, do you think I would be at risk of dismissal based on “totality of the circumstances” like in In re Parada? In re Henesbury is a situation where the deduction was not allowed because the family no longer resided in the property. My client could move into this condominium, make it his homestead for several months, and then file bankruptcy, if this makes the difference.
In conclusion, would you: (i) file as a business case because the debt for the investment condominium is not “consumer debt”; or (ii) file as a consumer case and deduct the condo secured payments in Line 42 of the means test? I really appreciate your input on these matters because I have 2 other clients waiting to retain me with the same scenario (they are a bit over CMI and will pass the means test if they can deduct in line 42 secured payments for investment condominiums that they have not paid in a long time and they will surrender).
If you prefer to just talk quickly instead of sending an email response, please let me know, and I will call you right away. Thanks!
Sincerely,
Fernando J. Portuondo, Esq.
Fernando J. Portuondo, P.A.
Tel. (305)567-9953
Fax.(305)567-2426
2121 Ponce De Leon Blvd.
Suite 950
Coral Gables, FL 33134
E-Mail: PortuondoF@bellsouth.net