When taken into perspective, the term consumer debt is somewhat broad given that it covers consumer credit in all forms that a consumer might have. The thing is that, having too much consumer debt is not really beneficial for an individual who earns an average income. The combination of the two leads the debtor’s sources of income suffer. Without proper debt management, consumer debts can easily lead an individual to bankruptcy.
The importance of distinction
If there are consumer debts, then there are non-consumer debts as well. The latter are also called as business debts which the bankruptcy trustee has to review more carefully. It is important that an individual determine exactly the type of debt they have especially in bankruptcy for the purposes of the bankruptcy means test which is a must in filing for bankruptcy. This is because a means test is only granted if more than half or all of the debtor’s debt fall under the category of consumer debts. Otherwise, the debtor need not pass the means test.
What is the best way to determine consumer debts?
While there are many definitions of consumer debt, the best rule of thumb to follow is that a debt can be classified as consumer debt if it was used primarily for personal, household, or family purposes. Any other debts that do not fall under those three categories are likely to be treated as non-consumer or business debts.
How are debts classified?
There are instances when consumer and non-consumer debts can be confused with one another. but there are some examples of debt classification that you can follow to know exactly whether a debt is to be considered as consumer or non-consumer debt.
Credit card debt – the most common type of consumer debts are credit card debts. However, purchases or cash advances made on the credit card should be evaluated to determine whether it was used for consumer purposes or otherwise. Credit card debt for food and gas are considered consumer debt.
Student loans – there are some cases when student loans are considered by the bankruptcy court as consumer debts. At most times, these debts are considered as non-consumer. Having a bankruptcy attorney would be the best approach if a bankrupt debtor happens to have this kind of debt.
Legal and support fees – debts incurred for domestic support obligations like alimony and child support are considered as consumer debts. Also, any legal fees incurred for household or family proceedings like child support, getting custody, or a divorce shall be considered as consumer debts.
Mortgages and car loans – house mortgages are considered a consumer debt even if it becomes a rental property. However, a mortgaged property that is purchased as an investment property for rentals is considered non-consumer. The same with the case of car loans. Vehicles purchased for the sake of business are considered as non-consumer. Otherwise, it would fall under the category of consumer debts. A bankruptcy attorney could help a lot in handling the classification of debts better.