Chapter 7 Eligibility
You own a business that’s been gulping down debt that you can no longer afford. You’ve heard the terms Chapter 7 and “51/49 principle.” Here is the first thing to understand. Chapter 7 eligibility is determined by the means test and what you owe doesn’t matter one whit. People are shocked to hear that.
The means test is based upon the average gross (pre-tax) income of your household for the last six months. The household income can come from anyone in your household, even if they are not filing bankruptcy (with the exception of Social Security retirement or disability payments.) The average household income is then multiplied by 12 and compared with the median household income in your state for a household of your size. If your income is lower than the median, you get to pass the means test and file Chapter 7.
If your income is higher, your lawyer will subtract all of your allowable household expenses, and maybe you still get to pass the means test. If you don’t, you will have to file a Chapter 13 bankruptcy, and that’s where you have to repay at least a portion of your debts. In a Chapter 7 bankruptcy, you don’t have to repay a dime to your creditors.
There has been much criticism of the means test, that it was written by lobbyists to keep people out of Chapter 7, and shift them to Chapter 13. Whatever you think of it, in 2026 the test is still on the books, and until it’s changed, you have to live with it. But your income isn’t the only gate into Chapter 7. There is also the gate of debt type. That brings us to the 51/49 principle.
A Primarily Non-consumer Debtor
One exception to the means test has to do with a debtor whose debt is “primarily” non-consumer debt, meaning the debt of a business or commercial enterprise. In other words, if you have 51% or more of your debt in non-consumer debts, you can arguably qualify for Chapter 7, no matter how much money you made in the prior six months. You simply have to check the box indicating that you are a primarily non-consumer debtor on the means test form, and you do not have to report any income at all. This 51/49 rule comes from Section 707(b) of the Bankruptcy Code. It is a “safe harbor” provision, for entrepreneurs who wish to start their own businesses or otherwise contribute to economic opportunity without fear of failure. No “abuse” motion can be brought against a debtor in this category by the U.S. Trustee.
Consumer debt is defined in the Bankruptcy Code as “debt incurred by an individual primarily for a personal, family, or household purpose.” For the most part, non-consumer debt is said to be debt incurred with the intention of making a profit, such as debt incurred for the purpose of investing in a business or running up credit card charges to finance a profit-seeking endeavor. A tax liability can also be considered a non-consumer debt. Mostly, what disqualifies a debtor from being considered a non-consumer debtor is a mortgage(s) or student loans, because a mortgage alone can be more than all your other debts added together. Not always, however.
Let’s say the business failed, and so did you. Now you have a fair amount of consumer debts (credit cards, maybe a car loan, etc) that you cannot repay. But it looks like you have another fair amount of non-consumer debts (business credit cards, maybe a loan that was used for the business), which exceed your consumer debts. In this case, you could check the box on the means test and indicate that the “primarily non-consumer” exception applies.
Guarding the Chapter 7 Gates Against Bad-faith Debtors
That is where a lot of owners stop reading, and it is a mistake, because the basic “good faith” test in Section 707(a) of the Bankruptcy Code applies to non-consumer cases. Once the means test form is completed and filed (with the non-consumer box checked), a red flag goes up at the office of the U.S. Trustee, the U.S. Department of Justice official charged with guarding the Chapter 7 gates against bad-faith debtors. The U.S. Trustee will review the petition, request additional information if necessary, and then file a motion to dismiss if the Trustee is not satisfied that the debtor has truly fallen on hard times.
The U.S. Trustee’s analysis is obviously case-specific: income, debts, expenses, general lifestyle, all are relevant. The bankruptcy court for the Eastern District of Michigan has dismissed Chapter 7 petitions where the schedules depicted a lavish lifestyle, a refusal to cut expenses and tighten the belt, or a failure to offer to pay part of the debt through Chapter 13, where the debtor clearly could. As now-retired Judge Rhodes put it in one such case, “Nothing in the bankruptcy code suggests that a debtor who has primarily business debts but who can pay those debts is entitled to chapter 7 relief.” If you’re driving a Lamborghini to bankruptcy court, it may get in the way.
The bottom line is there is no magic bullet. The 51/49 exception is real, but if it doesn’t fit your facts, filing Chapter 7 can just open the door to litigation. If you are concerned, or are considering filing Chapter 7 when you have primarily business debts, consult with an experienced bankruptcy attorney. He or she can help you make the right decision for your situation.
