Business Debt and the Means Test
Why Owners With MCA Guarantees Can Qualify on Income That Would Bar a Consumer Filer

Income alone never decides a Chapter 7 case.

The abuse dismissal machinery of Section 707 engages only where debts are primarily consumer debts, so an owner whose guarantees dwarf household balances can qualify on earnings that would remove a consumer filer from Chapter 7. The composition of the debt matters more than the size of the paycheck, and the first analysis belongs to the schedules rather than to the pay stubs.

The Gate Before the Math

Section 707 of the Code permits dismissal or conversion of a case filed by an individual debtor whose debts are primarily consumer debts, where granting relief would abuse the chapter (a provision MCA critics will describe as a loophole while the statute describes it as a gate). The income calculation that everyone fears comes second. The debt composition question comes first, and many owners never reach the math because the gate never closes on them.

The distinction follows the obligations rather than the occupation printed on the petition. An owner with predominantly personal balances can fall inside the consumer framework, while a wage employee carrying substantial business obligations can present the opposite composition. The labels that matter are attached to debts, if precision is wanted, not to job titles.

Where the gate does close on a consumer filer, the presumption of abuse turns on a statutory calculation of current monthly income against allowed expenses, rebuttable only by documented special circumstances such as serious medical need or active duty service. The calculation fills a federal form and consumes attorney hours in proportion to its complexity. Business debt owners watch that machinery from the outside, which is where the statute leaves them.

Primarily Means More Than Half

Primarily is a measure of dollars rather than of counts or of identity. Guarantees on MCA advances, business credit balances and trade debt sit on the business side of the scale where their purpose was commercial, and counsel should examine purpose, amount and legal status of each obligation before assigning it. The test measures your income only when your debts are household debts.

Calling an obligation business debt does not make the classification conclusive, and signing a guarantee does not convert a commercial advance into a household purchase. Consider a hypothetical owner whose MCA guarantees exceed the mortgage and card balances combined; the excess is what removes the case from the abuse presumption, not the ownership of the company as such. Counsel applies the test in dollars at filing, and close cases turn on how mixed purpose obligations are characterized, since a personal card used for inventory blurs the line the statute needs sharp.

What High Income Owners Still Face

Escape from one test is not escape from every gate. The federal courts guide to Chapter 7 describes each of them in turn: a dismissal inside the prior 180 days can bar the new filing, counseling before filing remains required, unpaid fees invite dismissal for cause, and the denial grounds of Section 727 reach fraud, concealment and false oath without regard to income or debt mix. Owners who pass the composition gate answer to the same trustee powers as everyone else.

Owners who pass the composition gate should therefore prepare with the same care as owners who face the full calculation. Evidence used against the debtor at a denial hearing looks identical in either posture, and confidence built on one favorable classification rarely survives a sloppy schedule.

Paperwork Differences That Reveal the Theory

In 2005, Congress attached the means calculation to consumer cases and left business cases to the older abuse standard of bad faith and totality of the circumstances. Primarily consumer filers complete the means form with pay evidence, while business debt filers complete schedules and statements that disclose the same financial life without that particular form.

The form follows the debt.

A Classification Decision Made Early

A sanguine assumption about which side of the line an obligation falls has ended more than one case in conversion to a chapter the debtor never wanted. Counsel will assemble every balance, classify each by purpose rather than by creditor name, and construct a filing position that addresses the trustee, the United States Trustee and the practical reality that a misclassified debt invites the very scrutiny the owner hoped to avoid. Steps the owner takes, or does not take, before the schedules are signed will decide whether the composition argument holds.

Delancey Street offers a free confidential initial review for owners deciding between bankruptcy and settlement of MCA guarantees, and a caller can ask whether the accounts qualify for settlement assistance. The company operates as a settlement company and coordinates legal analysis with independent counsel, since it is not a law firm. Simply collect the financing agreements, the guarantee pages and six months of statements before the first call, so counsel can ensure the classification rests on documents rather than on recollection, even where the filing timetable looks extremely tight and the creditor pressure feels extremely personal.

Most owners learn the composition rule after they assumed income was the entire test. The surprise is understandable. Resist the urge to move balances between columns in order to manufacture a favorable mix, since transfers made even briefly before filing draw the scrutiny they were meant to deflect, and attorneys should ensure no schedule is signed until every business purpose claim can be shown from the paper. The pay stub never decided these cases. This is the composition the Code examines in every filed case.