Consumer v. Non-Consumer Debt

Bankruptcy courts categorize debt differently depending on how a person accrued it. Specifically, they distinguish between consumer debt and non-consumer debt. Consumer debt is debt incurred by an individual primarily for a personal, family, or household purpose. Non-consumer debt encompasses all other debt (in other words, all debt that is not incurred primarily for personal purposes). How the court categorizes your debt could determine what type of bankruptcy Chapter you can file under, and how much debt you are able to discharge. You can file Chapter 7 bankruptcy and take advantage of its discharge only if less than half of your debt is consumer debt.

Consumer Debt

As noted above, consumer debt is any debt accrued to fund a debtor’s personal or familial consumption. This includes home mortgages, personal loans, credit card debt, car loans for a personal or family car, and debt owed for child support or alimony are all common types of consumer debt. What these debts all have in common is that they were accrued on behalf of either the debtor or the debtor’s family or household. In contrast, a mortgage or car loan accrued as a business expense would not qualify as consumer debt. Neither would credit card debt accrued from purchasing stocks or bonds.

Non-Consumer Debt

Non-consumer debt is any debt not accrued to fund personal or familial consumption. It is commonly referred to as “business debt” because most non-consumer debt is accumulated by spending for business or investment purposes. Business loans, personal guarantees, tax debt, mortgages for business properties, and necessary medical bills and legal fees are all categorized as non-consumer debt. All of this is either accrued for business purposes or otherwise unrelated to the debtor’s consumption.

A debtor may file for bankruptcy under Chapter 7 if fewer than half of their debts are consumer debts. Chapter 7 is often advantageous to individual debtors because a Chapter 7 discharge will release them from personal liability for most of their debts. Discharge prevents creditors from ever taking legal action against a debtor to collect debts that the debtor has discharged. You can read more about Chapter 7 bankruptcy in our blog post explaining it in detail.

Filing under Chapter 7 is not an option for debtors with more consumer debt than non-consumer debt. If this is your situation, you may have to file under Chapter 13 or another bankruptcy chapter. It is important to file under the Chapter that will put you in the best position financially once bankruptcy proceedings have concluded. An attorney can help you avoid common mistakes that people often make when filing for bankruptcy.

If you are considering filing for bankruptcy and have questions about what to do before filing, contact the experienced Indiana bankruptcy attorneys at McNeely Law to discuss your options.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.