Attorney at Debt Advisors Law Offices
Practice Areas: Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, Stop Foreclosure
When people think about bankruptcy, one of the first questions that comes up is whether their debt counts as “consumer debt” or “business debt.” This distinction matters more than many realize because it determines how courts evaluate eligibility for certain types of bankruptcy, including Chapter 7.
Understanding these terms can help you prepare for what lies ahead and make informed choices about your financial future.
In bankruptcy law, consumer debt is defined by the U.S. Bankruptcy Code.
Under 11 U.S.C. § 101(8), “consumer debt” means debt incurred by an individual primarily for a personal, family, or household purpose.
This category covers common obligations like credit card balances, auto loans, personal loans, and mortgages. These are the types of expenses tied to daily living rather than business operations.
Not all consumer debt is viewed in the same light. A mortgage, for example, can sometimes be considered a positive type of debt because it is connected to a tangible asset that may gain value over time.
High-interest debts like credit cards, payday loans, or certain auto loans are considered negative because they can trap borrowers in cycles of repayment without building long-term value.
One of the most important distinctions in bankruptcy is whether your debts are consumer or business related. Courts look at the purpose of the loan or expense.
This distinction matters because bankruptcy rules apply differently depending on the debt type.
If more than half of your total debts are consumer debts, you must pass the Chapter 7 means test before qualifying for liquidation bankruptcy.
Business debts, however, are not counted in this way. That’s why individuals who carry a mix of both may find classification makes a major difference in their eligibility.
The Chapter 7 test is a calculation that looks at your income, expenses, and debt classification. It was created to prevent abuse of the bankruptcy system and ensure Chapter 7 is reserved for those who truly cannot repay.
If your debts are mostly consumer debts meaning 50 percent or more you must pass the means test to file for Chapter 7. This involves reviewing household income against state median income levels, allowed expenses, and total debt.
Medical bills often come as a surprise here. While they feel like personal debts, they are usually treated as non-consumer debts. This can shift the balance for some families and affect whether the means test applies.
A Wisconsin bankruptcy attorney can guide you through the means test, explain how state-specific exemptions apply, and ensure debts are correctly classified. This professional guidance is crucial, especially when borderline cases like student loans or medical bills come into play.
Not every debt is straightforward. Some debts straddle the line between consumer and business.
These classifications highlight the importance of accurate records. Trustees will review not only what type of debt exists but also the purpose and timing of each obligation.
To make the differences clearer, here is a comparison of common debt types.
| Type of Debt | Consumer or Business? |
Notes / Exceptions |
| Credit Cards | Consumer | Unless used solely for business expenses |
| Auto Loan | Consumer | Business if vehicle used primarily for work |
| Mortgage | Consumer | Business if tied to rental/investment property |
| Medical Bills | Often Non-Consumer | Classification varies by court |
| Student Loans | Usually Consumer | May differ if strictly business-related |
| Business Loan | Business | Must show funds used for business |
Filing for bankruptcy is not simply about listing what you owe. How debts are classified will shape the options available to you. Consumer debts can trigger the means test, while business debts are handled differently.
Because classification can be tricky, especially when medical bills or mixed-use loans are involved, it is wise to seek professional guidance. Every situation is unique, and outcomes depend on a careful review of the facts.
Consumer debt includes obligations like credit cards, mortgages, auto loans, and personal expenses used for household or family needs.
If more than half of your total debt is consumer-related, you must pass the Chapter 7 means test to qualify for bankruptcy.
Medical bills are usually classified as non-consumer debt, though some exceptions may apply depending on how the expenses arose.
Student loans are generally consumer debts, though some may be viewed differently if tied directly to professional or business purposes.
Classification determines whether you must complete the means test and can affect how your debts are discharged in bankruptcy.
Yes. Both are included, but courts treat them differently, which may influence your eligibility for Chapter 7.
Bankruptcy law makes a clear distinction between consumer and business debt, and this difference plays a key role in whether someone qualifies for Chapter 7. Understanding how debts are defined, how the means test applies, and where tricky classifications come into play can help you prepare before filing.
For Wisconsin residents, knowing the difference between consumer and business debt is especially important, as outcomes depend on your unique financial situation. Bankruptcy may provide a fresh start, but classification is critical to getting the process right.
If you are considering bankruptcy and need clarity about how your debts are classified, Debt Advisors Law Offices can guide you through the process with accuracy and care.
Learn about bankruptcy protections, types of bankruptcy, how to get started, what to expect, and who to trust. Filing bankruptcy is the ONLY way to completely eliminate debt. If bankruptcy is right for you, it offers powerful protections that cannot be achieved through alternative solutions such as hardship relief, loans, or debt settlement.
