The Bankruptcy Means Test for Business Owners: Does It Apply to You?

Key Rule: The Means Test Does Not Apply to Every Business Owner

One of the biggest misconceptions about Chapter 7 bankruptcy is that every person who files has to pass the bankruptcy means test.

That simply is not true.

For many business owners, the means test never comes into play.

If more than half of your total debt is business-related, you are generally exempt from the means test. Commercial loans, vendor balances, equipment financing, merchant cash advances, business leases, and other obligations incurred to operate your business are treated differently than personal debts.

That distinction matters.

Too many business owners assume they have to complete a lengthy income analysis before they can file Chapter 7. In reality, the first question is much simpler:

Are most of your debts business debts or consumer debts?

If the answer is business debt, the income calculation that many people associate with the means test may never apply.

Understanding that threshold issue from the beginning can save time, eliminate unnecessary confusion, and help you focus on the bankruptcy options that actually fit your situation.

If you are evaluating whether Chapter 7 is the right solution, speaking with an experienced Chapter 7 bankruptcy attorney early in the process can help determine whether the means test applies before you spend time gathering unnecessary financial information.

What Is the Bankruptcy Means Test? (Definition for Business Owners)

The bankruptcy means test is a financial screening process used to determine whether certain individuals qualify to file Chapter 7 bankruptcy.

Its purpose is to identify consumer debtors who have enough disposable income to repay a portion of their debts through another chapter of the Bankruptcy Code rather than receiving a Chapter 7 discharge.

For business owners, however, there is an important exception.

The means test generally applies only to individuals whose debts are primarily consumer debts.

If your financial problems stem from operating a business rather than personal spending, the analysis often ends before the income calculation even begins.

That is why identifying the nature of your debt is usually the first step in evaluating Chapter 7 eligibility.

Business owners considering bankruptcy often have several possible paths available, and the right choice depends on much more than income alone.

How the Means Test Was Created

Congress introduced the bankruptcy means test as part of broader bankruptcy reform designed to prevent higher-income consumer debtors from using Chapter 7 when they had the ability to repay a meaningful portion of their debts.

The focus was consumer credit.

It was not intended to limit access to bankruptcy for business owners whose financial difficulties arose from operating a company.

That distinction remains one of the most important parts of the law today.

Many business owners assume the means test automatically applies simply because they own a business and are considering bankruptcy.

In many cases, that assumption is incorrect.

What Is Current Monthly Income (CMI)?

If the means test does apply, one of the first calculations involves determining your Current Monthly Income, commonly referred to as CMI.

Current Monthly Income is not simply what you earned last month.

Instead, it is based on the average income received during the six full calendar months before the bankruptcy filing.

Depending on your circumstances, that calculation may include wages, salary, net business income, rental income, pension payments, and certain income received by a non-filing spouse.

Some sources of income are excluded under the Bankruptcy Code.

Because the calculation can become complicated, especially for business owners with fluctuating revenue, it is important to evaluate every income source carefully before filing.

Understanding the Six-Month Lookback Period

Timing can have a significant impact on the means test.

Rather than looking at your current income on the day you file, the Bankruptcy Code looks back over the previous six full calendar months and averages that income.

For business owners, that can make a substantial difference.

A seasonal business, a company that recently lost a major customer, or a business that experienced declining revenue may show a very different financial picture than last year's tax return suggests.

Likewise, filing too early or too late can change which months are included in the calculation.

That is one reason filing dates should never be selected without first reviewing how the six-month lookback affects the overall analysis.

What Is Considered Business Debt vs. Consumer Debt?

Whether the means test applies often comes down to one question:

Why was the debt incurred?

Consumer debt is generally debt taken on for personal, family, or household purposes.

Examples include personal credit cards, auto loans for personal vehicles, personal mortgages, and other household obligations.

Business debt serves a different purpose.

Commercial loans, equipment financing, trade payables, vendor balances, merchant cash advances, commercial leases, inventory financing, and many personal guarantees signed for business obligations are typically considered business debt because they were incurred to operate or support a business.

The analysis focuses on the purpose of the debt, not simply whose name appears on the loan documents.

That distinction becomes especially important for sole proprietors and business owners who personally guaranteed commercial obligations.

Before deciding which bankruptcy chapter makes the most sense, many business owners also benefit from reviewing Chapter 7 bankruptcy options alongside Chapter 11 bankruptcy solutions to determine which approach best fits their financial circumstances.

Does the Means Test Apply to Business Owners Filing Chapter 7?

For many business owners, this is the most important question in the entire bankruptcy process.

The answer is often simpler than people expect.

If more than half of your total debt is business debt, you are generally not required to complete the bankruptcy means test.

That determination comes before any income calculations.

In other words, you do not start by looking at your earnings. You start by identifying the type of debt you owe.

Many business owners are surprised to learn they qualify for Chapter 7 without ever completing the means test because most of their financial obligations came from operating a business rather than personal spending.

Taking the time to answer that threshold question first can prevent unnecessary work and help you focus on the bankruptcy options that actually apply to your situation.

The "Primarily Business Debt" Exemption

The Bankruptcy Code draws a clear line between consumer debt and business debt.

If most of your debt was incurred for business purposes, the means test generally does not apply.

For many New York business owners, that includes obligations such as:

• Commercial loans
• Merchant cash advances
• Vendor balances
• Equipment financing
• Commercial leases
• Trade debt
• Personal guarantees tied to business obligations

When those business debts make up more than half of your total debt, the Chapter 7 means test is usually no longer part of the analysis.

Instead of focusing on income calculations, the discussion shifts to whether Chapter 7 is the right strategy based on your business, assets, and long-term goals.

How the 50 Percent Rule Is Determined

Whether your debts are primarily business-related is based on dollar amount, not the number of accounts you owe.

For example, a business owner may have several personal credit cards but substantially more debt tied to commercial loans, vendor obligations, and equipment financing.

In that situation, the business debt may still represent the majority of the total debt.

The analysis looks at the complete financial picture as it exists when the bankruptcy case is filed.

While some situations are straightforward, others require a careful review of each obligation to determine whether it should be classified as consumer debt or business debt.

That review is often one of the first steps a bankruptcy attorney performs when evaluating Chapter 7 eligibility.

When Business and Personal Debt Are Mixed

Many business owners carry both business debt and personal debt.

That alone does not determine whether the means test applies.

Imagine a restaurant owner who personally owes credit card debt while also carrying commercial lease obligations, vendor balances, equipment loans, and merchant cash advances.

The question is not how many debts exist in each category.

The question is which category represents the larger share of the total debt.

Once the business debt exceeds the consumer debt, the means test generally no longer applies.

For business owners with a combination of commercial and personal obligations, reviewing each debt individually is often the only reliable way to determine which bankruptcy rules apply.

Why This Matters for New York Business Owners

Business owners in New York often carry financial obligations that look very different from those of individual consumers.

Commercial rent.

Business lines of credit.

Equipment financing.

Trade payables.

Merchant cash advances.

Personal guarantees.

These obligations are common for businesses operating throughout Manhattan, Brooklyn, Queens, the Bronx, Staten Island, Long Island, and Westchester.

Assuming the means test automatically applies simply because you own a business can lead you down the wrong path from the very beginning.

Determining whether your debts are primarily business-related is usually the first step in evaluating your Chapter 7 options.

Businesses dealing with significant commercial obligations may also benefit from reviewing commercial debt restructuring solutions, particularly when bankruptcy is only one of several available options.

How Business Income Is Calculated in the Means Test

If the means test does apply, the next step is calculating your Current Monthly Income.

For business owners, that calculation is often misunderstood.

The Bankruptcy Code does not simply look at gross business revenue.

Instead, it focuses on the income that remains after ordinary and necessary business expenses have been paid.

That distinction can make a substantial difference in the outcome of the analysis.

Gross Revenue vs. Net Business Income

One of the most common mistakes business owners make is confusing revenue with income.

They are not the same.

Gross revenue is the total amount your business brings in before expenses.

Net business income reflects what remains after paying the ordinary costs of operating the business.

For purposes of the means test, net business income is generally the number that matters.

For example, a business may generate significant monthly revenue but also have substantial expenses for payroll, inventory, rent, insurance, equipment, and other operating costs.

Looking only at the top-line revenue would not accurately reflect the business owner's financial position.

Why the Filing Date Can Make a Difference

Timing matters.

The means test looks at the six full calendar months before the bankruptcy filing.

That means the date you file determines which months are included in the calculation.

For businesses with seasonal income, declining sales, or recent financial setbacks, choosing the filing date carefully may significantly change the numbers used in the means test.

A company that experienced a sharp drop in revenue several months ago may present a much different financial picture than one relying only on last year's tax return.

Filing should never be based on the calendar alone.

It should also take into account how the six-month lookback period affects the overall bankruptcy strategy.

Does a Non-Filing Spouse's Income Count?

In many situations, yes.

When the means test applies, income earned by a non-filing spouse may also be considered as part of the Current Monthly Income calculation.

That can have a meaningful impact for business owners whose spouse earns a separate salary or has another source of regular income.

Exactly how that income is treated depends on the family's circumstances and the structure of the bankruptcy filing.

Because these situations vary from case to case, the calculation should always be reviewed carefully before filing.

Income That May Not Be Included

Not every source of income is counted for purposes of the means test.

Certain types of income are excluded under the Bankruptcy Code.

Determining what should and should not be included is another reason business owners should avoid relying on online calculators or generalized bankruptcy information.

An accurate analysis depends on reviewing the complete financial picture rather than making assumptions based on a single income figure.

What Are the New York Means Test Income Thresholds?

If the means test applies to your case, the next question is whether your income falls above or below New York's median income for a household of your size.

This is the first step in the financial analysis.

If your Current Monthly Income is below the applicable median, you generally pass the means test without having to complete the more detailed expense calculations.

If your income is above the median, it does not automatically prevent you from filing Chapter 7.

It simply means the analysis continues.

Many business owners assume they are disqualified once their income exceeds the median. That is not how the process works. Additional deductions and other factors may still allow you to qualify.

Current New York Median Income by Household Size

The median income figures used in the bankruptcy means test are updated periodically.

Because those numbers change, anyone considering bankruptcy should rely on the current figures in effect when the case is filed rather than older income charts found online.

The household size used for the calculation also matters.

A one-person household is measured differently than a family of four, and each additional household member changes the applicable income threshold.

Reviewing the current numbers before filing helps ensure the analysis is based on the most recent requirements.

Does It Matter Whether You File in the Southern or Eastern District of New York?

No.

The bankruptcy means test is based on federal law, so the same rules apply whether your case is filed in the Southern District of New York or the Eastern District of New York.

Where the districts differ is in the courts that handle the case.

The Southern District includes Manhattan, the Bronx, and Westchester County.

The Eastern District includes Brooklyn, Queens, Staten Island, Nassau County, and Suffolk County.

While local procedures and trustee practices may vary from one court to another, the legal standards governing the means test remain the same.

Understanding which court will hear your case is still important because local procedures can affect how your bankruptcy moves through the system.

How New York's Cost of Living Can Affect the Analysis

Living and operating a business in New York is expensive.

Housing costs.

Transportation.

Insurance.

Utilities.

Operating expenses.

All of these costs can affect the financial analysis when the means test applies.

Business owners whose income exceeds the New York median are not automatically disqualified from Chapter 7.

The Bankruptcy Code allows certain deductions that recognize the real cost of living and doing business.

Those deductions may reduce disposable income enough for a debtor to qualify, even when their earnings initially appear to be above the median.

Every financial situation is different, which is why the analysis should be based on the complete picture rather than income alone.

Allowable Deductions That May Reduce Disposable Income

If your case requires the full means test calculation, several categories of expenses may be deducted before determining whether enough disposable income exists to repay creditors.

Depending on the circumstances, those deductions can include certain housing costs, transportation expenses, health insurance premiums, taxes, and other expenses recognized under the Bankruptcy Code.

The deductions available in one case may not be available in another.

For that reason, completing the means test is rarely as simple as entering your income into an online calculator.

A careful review of your financial records often makes a significant difference in the final calculation

What Happens If a Business Owner Does Not Pass the Means Test?

Failing the means test does not mean your bankruptcy options disappear.

It simply means Chapter 7 may not be the right chapter under your particular circumstances.

Business owners often have other options available, including Chapter 13, Chapter 11, or Subchapter V, depending on their debt, income, and long-term goals.

The important thing is understanding why the means test was not satisfied before deciding what to do next.

The next step should be choosing the bankruptcy strategy that best protects both your finances and your business.

Understanding the Presumption of Abuse

When the means test shows sufficient disposable income to repay creditors, the Bankruptcy Code creates what is known as a presumption of abuse.

That does not automatically mean your Chapter 7 case will be dismissed.

Instead, it creates a legal presumption that Chapter 7 may not be the appropriate chapter.

Depending on the circumstances, there may still be ways to address that issue or pursue another bankruptcy option that better fits your financial situation.

When Chapter 13 May Be the Better Option

For some business owners, Chapter 13 provides another path forward.

Instead of eliminating qualifying debt through Chapter 7, Chapter 13 allows eligible individuals to repay a portion of their debts through a court-approved repayment plan over several years.

That approach can be useful for business owners who have regular income, want to protect certain assets, or need time to catch up on secured obligations.

Whether Chapter 13 is available depends on several factors, including the amount and type of debt involved.

When Chapter 11 or Subchapter V Makes More Sense

Business owners with larger debt loads or ongoing business operations often find that Chapter 11 provides more flexibility than Chapter 7 or Chapter 13.

Rather than shutting down the business, Chapter 11 is designed to allow the company to continue operating while its debts are reorganized through a court-approved plan.

For qualifying small businesses, Subchapter V bankruptcy offers a more streamlined version of Chapter 11 that reduces many of the costs and procedural requirements found in a traditional Chapter 11 case.

Determining whether Subchapter V is available requires a careful review of the business's financial circumstances and eligibility under the Bankruptcy Code.

Can the Presumption of Abuse Be Challenged?

In some situations, yes.

The Bankruptcy Code recognizes that unusual circumstances can affect a person's financial condition in ways that the standard means test does not fully capture.

A serious illness, military service, or other extraordinary events may justify additional adjustments during the bankruptcy process.

Whether those circumstances apply depends on the facts of each case and the supporting documentation available.

For that reason, a business owner should never assume that an unfavorable means test result automatically ends the conversation.

Common Mistakes New York Business Owners Make When Evaluating the Means Test

The bankruptcy means test is often misunderstood, especially by business owners.

Many people spend time worrying about income calculations before answering the question that matters most: Does the means test even apply?

These are some of the most common mistakes we see.

Mistake #1: Assuming the Means Test Always Applies

This is the biggest misconception.

Owning a business does not automatically mean you have to complete the means test.

If most of your debt is business-related, you may be exempt from the means test altogether.

Unfortunately, many business owners skip that first step and immediately begin gathering income records and completing calculations they may never have needed.

Before looking at income, determine whether your debts are primarily business debts or consumer debts.

That answer often determines the rest of the analysis.

Mistake #2: Using Gross Revenue Instead of Net Business Income

Business owners often focus on how much money the business brings in.

The Bankruptcy Code looks much deeper than that.

If the means test applies, the calculation generally considers the income remaining after ordinary and necessary business expenses have been paid.

Looking only at gross receipts can create a misleading picture of the business's financial condition.

Payroll, rent, inventory, insurance, taxes, equipment costs, and other operating expenses all affect what the business actually earns.

Using the wrong numbers can lead to unnecessary confusion and may cause a business owner to believe they do not qualify for Chapter 7 when a more complete review tells a different story.

Mistake #3: Ignoring the Timing of the Filing

The date a bankruptcy case is filed is more important than many people realize.

Because the means test looks at the six full calendar months before filing, changing the filing date by even a few weeks can affect which months are included in the calculation.

For businesses with seasonal income or declining revenue, that timing may significantly change the financial picture presented in the bankruptcy case.

Choosing when to file should be part of the overall legal strategy, not simply a date selected because financial pressure has become overwhelming.

Mistake #4: Forgetting About a Spouse's Income

Many business owners assume that if their spouse is not filing bankruptcy, their income is irrelevant.

That is not always the case.

When the means test applies, a non-filing spouse's income may still affect the Current Monthly Income calculation.

How that income is treated depends on the specific facts of the case.

Reviewing those issues before filing can help avoid surprises later in the bankruptcy process.

Choosing the Right Bankruptcy Chapter as a New York Business Owner

Passing or failing the means test is only one part of the decision.

The bigger question is which bankruptcy chapter best supports your goals.

Some business owners want to eliminate debt and move on.

Others want to keep operating while restructuring their finances.

The right approach depends on your business, your assets, your debt structure, and what you hope to accomplish after the bankruptcy is over.

That is why bankruptcy planning should always begin with a full review of the facts rather than assuming one chapter is right for everyone.

Chapter 7: A Fresh Start for Many Business Owners

For business owners who qualify, Chapter 7 often provides the fastest path to eliminating qualifying debt.

There is no repayment plan.

Instead, the goal is to resolve eligible debts and give the debtor an opportunity to move forward financially.

For owners whose businesses have already closed or who are ready to wind down operations, Chapter 7 may provide the clean break they need.

Learning more about Chapter 7 bankruptcy can help business owners understand whether this approach fits their circumstances.

Chapter 13: A Structured Repayment Plan

Chapter 13 allows eligible individuals to reorganize debt through a court-approved repayment plan.

Rather than receiving an immediate discharge, the debtor makes payments over several years based on their financial circumstances.

For some business owners, Chapter 13  provides an opportunity to protect valuable assets while catching up on secured debt and addressing other financial obligations in an organized way.

Not every business owner qualifies, but when Chapter 7 is unavailable or does not meet the client's goals, Chapter 13 may provide another path forward.

Chapter 11 and Subchapter V: Keeping the Business Operating

Business owners who want to continue operating often find that Chapter 11 offers the flexibility they need.

Instead of closing the business, Chapter 11 allows the company to continue operating while its debts are restructured under court supervision.

For many small businesses, Subchapter V bankruptcy provides a more efficient path by simplifying many of the procedures required in a traditional Chapter 11 case.

Choosing between Chapter 11 and Subchapter V depends on the size of the business, the amount of debt involved, and the company's long-term restructuring goals.

Frequently Asked Questions

Does the bankruptcy means test apply to every business owner filing Chapter 7?

No.

Many business owners never have to complete the means test.

The first question is whether your debts are primarily consumer debts or business debts. If more than half of your total debt was incurred for business purposes, the means test generally does not apply.

That is why identifying the nature of your debt should always come before reviewing income.

How is business income calculated if the means test applies?

If the means test applies to your case, the calculation is based on your Current Monthly Income, which generally looks at the average income received during the six full calendar months before filing.

For business owners, the focus is typically on net business income rather than gross revenue.

Looking only at sales or gross receipts rarely tells the full story. Operating expenses, payroll, rent, inventory, insurance, and other ordinary business costs all affect the financial picture.

Because every business is different, the calculation should be based on complete financial records rather than estimates or online calculators.

What if my income is higher than New York's median income?

That does not automatically prevent you from filing Chapter 7.

If your income exceeds the applicable median, the means test simply moves to the next stage of the analysis.

Additional deductions may reduce your disposable income enough to qualify.

The final result depends on your overall financial circumstances, not just one income figure.

What happens if I do not qualify under the means test?

Failing the means test does not mean you have run out of options.

Depending on your circumstances, Chapter 13, Chapter 11, or Subchapter V bankruptcy may provide a better solution.

Many business owners ultimately discover that reorganizing debt is a better fit than liquidation because it allows them to continue operating while addressing their financial obligations.

The right chapter depends on your goals, the amount and type of debt involved, and whether you intend to keep the business operating.

Does my spouse's income affect the means test?

In many cases, yes.

If the means test applies, income earned by a non-filing spouse may be included in the calculation.

Exactly how that income is treated depends on the facts of your case, which is why it is important to review your financial situation carefully before filing.

Can Chapter 11 help me avoid the means test?

Chapter 11 does not require a debtor to pass the Chapter 7 means test.

Instead, it allows qualifying businesses to reorganize debt under the protection of the Bankruptcy Court while continuing operations.

For many small businesses, Subchapter V bankruptcy offers a more streamlined and cost-effective restructuring process than a traditional Chapter 11 case.

Whether Chapter 11 or Subchapter V is the better option depends on the size of the business, the debt structure, and the company's long-term objectives.

Choosing the Right Bankruptcy Strategy Starts With the Right Analysis

The bankruptcy means test is an important part of many Chapter 7 cases, but it is not where every business owner's analysis begins.

Before reviewing income, it is essential to determine whether the means test applies at all.

For many business owners, that single question changes the entire discussion.

From there, the focus shifts to identifying the bankruptcy chapter or restructuring strategy that best supports your business and your financial goals.

Some business owners benefit from Chapter 7.

Others are better served by Chapter 11, Subchapter V, Chapter 13, or an out-of-court workout.

There is no one-size-fits-all answer.

Every recommendation should be based on a careful review of the business, its debt, its assets, and its long-term objectives.

To learn more about the firm's bankruptcy and commercial restructuring practice, visit the J. Singer Law Group home page.

Schedule a Confidential Consultation

If you are a business owner facing overwhelming debt, creditor lawsuits, merchant cash advance collections, or other financial challenges, understanding your options before making a decision can make a significant difference.

J. Singer Law Group represents business owners throughout Manhattan, Brooklyn, Queens, the Bronx, Staten Island, Long Island, Westchester, and across New York in Chapter 7, Chapter 11, Subchapter V, commercial loan workouts, and business restructuring matters.

Every case begins with a careful review of the client's financial circumstances so the legal strategy fits the business, not the other way around.

If you are ready to discuss your situation, contact J. Singer Law Group to schedule a confidential consultation.

J. Singer Law Group, PLLC
1 Liberty Street, Suite 2327
New York, NY 10006

Phone: (917) 905-8280