When the 2005 bankruptcy law was adopted by Congress it created a new “means test” that borrowers had to pass if they wanted to qualify for a Chapter 7. Congress limited this requirement only to debtors with primarily consumer debt. In other words, debtors who had incurred most of their debt from a failed business could avoid having to pass the means test in order to file Chapter 7. The provision allowed business debtors to file Chapter 7 even though their budget might have shown substantial income. The 8th Circuit Bankruptcy Appellate Panel (BAP) has ruled though, that a Nebraska bankruptcy court was correct when it approved the forced conversion of a Chapter 7 to Chapter 11 for a debtor who had primarily non-consumer debt but whose budget showed substantial disposable income. The Court said the conversion was acceptable under a different provision of the Code then the provision dealing with exemption from the means test for business debtors.
The Court’s decision raises serious implications for debtors who might need to file bankruptcy because of a failed prior business but who still have high incomes. The decision will hopefully be appealed but unless overturned by a higher court, this decision may lead to more debtors having to use Chapter 11 as a way to eliminate debt from a failed business.