A business bankruptcy is one in which the majority of the filer’s debt is business debt. If a business entity—such as a partnership, limited liability company, or corporation—files for bankruptcy, categorizing the bankruptcy will be straightforward. The filing will be a business bankruptcy.
But it isn’t always that simple. An individual who operates a business can—and probably will—have business debt and another type, too—consumer debt. If the filer’s debt is primarily consumer in nature, the bankruptcy will be a consumer bankruptcy—even if the filer has some business debt, as well. Whichever type the filer has more of will determine the classification.
How do you know if your debt is business debt? Business debt and a profit motive go hand-in-hand. Simply put, you incur business debt while trying to make money. For instance, if you borrow money to buy a food truck, the loan would be of a business nature. The same would hold true if you purchased tools for your construction business. (Find out more by reading What Is Business Debt in Bankruptcy?)
What makes a debt a consumer debt? You’ll owe consumer debt if you purchase goods and services of a personal nature on credit. Examples of consumer debt would include:
- housing expenses
- clothing and school supplies for your children, and
- costs for a gardener, housekeeper, or pool services.
(You can learn additional details in What Does Primarily Consumer Debt Mean in Bankruptcy?)
Why does it matter whether the bankruptcy is a consumer or business bankruptcy? If you file a Chapter 7 bankruptcy, and your debt is primarily consumer debt, you must pass the “means test” to receive a discharge (get your qualifying debts wiped out). Specifically, your income cannot exceed the median income in your state for your family’s size after subtracting allowable deductions. If you file a business bankruptcy, you get to skip this step.
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