§ 65.2 — Consumer Debts Only
Revised: May 24, 2004
The codebtor stay prohibits a creditor from collecting “all or any part of a consumer debt” from an individual who is liable on such debt with the debtor.1 Consumer debt is defined in 11 U.S.C. § 101(8) as “debt incurred by an individual primarily for a personal, family or household purpose.”2 The codebtor stay is a salutary effort by Congress to enhance the effectiveness of debt repayment through a Chapter 13 case. Curiously, the courts have narrowly construed consumer debt for purposes of the codebtor stay.
Finding a personal family or household purpose is easy when, for example, the co-signed debt was incurred to buy a car used by the debtor to drive to work and to drive children to school.3 It is logical that a home mortgage for the debtor’s residence would be a consumer debt.4 What could be more “personal, family or household” than a debt incurred for the home in which the debtor’s family lives? However, at least one court has concluded that a home mortgage is not a consumer debt.5 There is some support in the legislative history to 11 U.S.C. § 101(8) that debts secured by real property are not consumer debts.6 However, the Code itself points to the contrary conclusion. “Debt” is defined as “liability on a claim.”7 “Claim” means “right to payment, whether or not such right is . . . secured, or unsecured . . . .”8 A debt secured by real property, if “incurred . . . primarily for a personal, family, or household purpose,” would be a consumer debt protected by § 1301. It has been held that condominium association fees are a consumer debt that cannot be collected from a nonfiling spouse under § 1301.9 Home mortgages should be the poster child for consumer debts.10
Income earned to support the debtor and the debtor’s family would be family income, and the taxes payable on that income would logically have the same personal, family or household character as the income. However, again, courts have concluded that income tax liability is not a consumer debt.11 Thus, if only one spouse files, the nonfiling spouse is not protected from the tax collector by § 1301.12 Going even further, one court held that personal property taxes on the debtor’s purchase of a car are not a consumer debt though it was undisputed that the car was acquired for personal, family or household use.13 It has been held that professional fees are not a consumer debt, and thus § 1301 does not protect a nonfiling codebtor from collection of prepetition fees.14 In contrast, another court held that legal fees “expended to extricate [the debtor] from an abusive marriage . . . falls squarely within the ‘personal or family’ prongs of the definition of consumer debt.”15
Some debts clearly are not consumer debts. For example, if the debtor borrowed money to construct rental property, the construction loan is not a consumer debt.16 A debt incurred to bond a judgment on appeal fails the consumer debt test.17 Less clearly, it has been held that a debt is a consumer debt when the debtor is a sole proprietor and borrows money that indirectly goes into a business.18 Applying a “profit motive” test, a loan for a car used in a driving school was not a consumer debt for § 1301 purposes notwithstanding that income from the business funded the Chapter 13 plan.19 One court held that a tort judgment “clearly” is not a consumer debt.20
The reluctance of courts to read the broad definition of consumer debt consistent with the good purposes of § 1301 is baffling. Congress made the policy choice to extend a bankruptcy stay to nondebtors in the narrow class of cases involving individuals eligible for Chapter 13, and then only with respect to certain codebtors and certain debts. To say that the taxes incurred when a debtor incurs a consumer debt are not also a consumer debt is illogical. This reasoning would also lead to the conclusion that the interest charged by a lender for a loan to buy a family car is not a consumer debt for § 1301 purposes. The purpose of the underlying transaction should color all of the incidents such as taxes, interest and fees that are incurred by the debtor. The debtor’s purpose controls whether a debt is a consumer debt, not the purpose of other parties to the transaction such as the seller or lender or the government that imposes a tax.
1 11 U.S.C. § 1301 (emphasis added).
2 11 U.S.C. § 101(8).
3 In re Janssen, 220 B.R. 639 (Bankr. N.D. Iowa 1998) (Loans to purchase a truck that the debtor used to and from work and loans for household expenses, schooling and child care expenses are consumer debts for purposes of §§ 1301 and 1322(b)(1).).
4 In re Zersen, 189 B.R. 732, 740 n.4 (Bankr. W.D. Wis. 1995) (In a note, “the better view is that a loan incurred by a debtor to purchase a family home is a consumer debt.”).
5 See In re Ikeda, 37 B.R. 193 (Bankr. D. Haw. 1984).
6 “A consumer debt does not include a debt to any extent the debt is secured by real property.” 124 Cong. Rec. H11,090 (daily ed. Sept. 28, 1978) (remarks of Congressman Edwards); id. at S17,406 (daily ed. Oct. 6, 1978) (remarks of Sen. DeConcini). These congressional statements are not reflected in the language of 11 U.S.C. § 101(8). This misdirected legislative commentary may be related in some way to § 606 of the former Bankruptcy Act, 11 U.S.C. § 1006 (repealed), which defined “claims” in a Chapter XIII case to exclude claims secured by real property. It is easy to conceive of situations in which an individual debtor would borrow money for a personal, family or household purpose and grant a lender a security interest in real property. Resort to legislative history to “define” consumer debt confuses an otherwise straightforward statutory definition.
7 11 U.S.C. § 101(12).
8 11 U.S.C. § 101(5)(A) (emphasis added).
9 In re Haugland, 199 B.R. 125, 127–28 (Bankr. D.N.J. 1996) (“[T]he debt . . . is secured by real property—the condominium. . . . [T]he term ‘household’ contained in 11 U.S.C. § 101(8) is sufficiently broad to include condominium association fees which serve to enhance the condominium’s appearance, function and utility. . . . [O]btaining a civil judgment and a levy against the Haugland’s account and pursuing the funds after the filing of the Debtor’s petition . . . is . . . the type of situation that Congress intended to prevent.”).
10 See In re Bertolami, 235 B.R. 493, 496–97 (Bankr. S.D. Fla. 1999) (Debt secured by real property incurred to build principal residence is a consumer debt notwithstanding that the debtor converted the residence to rental property before the Chapter 13 case. Applying Zolg v. Kelly (In re Kelly), 841 F.2d 908 (9th Cir. 1988), “this Court will look to clear and unambiguous language of § 101(8) instead of the Congressional Record Statements of Senator DeConcini and Representative Edwards pertaining thereto. Section 101(8) does not exclude debt secured by real property or a residential mortgage from the definition of consumer debt. . . . The Fifth Circuit in In re Booth, 858 F.2d 1051 (5th Cir. 1988), held that ‘the test for determining whether a debt should be classified as a business debt, rather than a debt acquired for personal, family or household purposes, is whether it was incurred with an eye toward profit.’ . . . Bartolamis executed the note and residential mortgage with the intention of using the Subject Property as their home . . . the Subject Property ceased to be their home approximately three years prior to the Petition Date . . . . The fact that the Bartolamis no longer reside at Subject Property and no longer consider it to be their homestead does not change the circumstances under which that debt was originally incurred.”).
11 IRS v. Westberry (In re Westberry), 215 F.3d 589, 591–93 (6th Cir. 2000) (Income and self-employment taxes are not consumer debts for purposes of codebtor stay in § 1301. “[A] tax debt is ‘incurred’ differently from a consumer debt. . . . [I]ncurrence is not voluntary on the part of the taxpayer. . . . [T]axes are incurred for a public purpose. . . . [T]axes arise from the earning of money, while consumer debt results from its consumption. . . . [U]nlike taxes, consumer debt normally involves the extension of credit. . . . [T]he profit motive test, which was used by the bankruptcy court in this case is not determinative of this issue. . . . This test was derived from a similar test used under the consumer protection statutes upon which the Bankruptcy Code’s definition of consumer debt was derived. . . . [W]hile the profit motive analysis may assist in the determination of which debts are not consumer debt, it does not prohibit other debts from falling outside of the category of consumer debt.”); In re Dye, 190 B.R. 566 (Bankr. N.D. Ill. 1995) (Tax liability is not a consumer debt. IRS did not violate codebtor stay when it sought collection of joint income tax liability from debtor’s former spouse.); In re Greene, 157 B.R. 496, 497 (Bankr. S.D. Ga. 1993) (Joint and several income tax liability is not a “consumer debt” for purposes of § 1301 because “the debt is incurred while earning income and not during consumption activity.”); In re Reiter, 126 B.R. 961 (Bankr. W.D. Tex. 1991) (Tax debt is involuntarily imposed for a public purpose. It does not qualify as consumer debt within the meaning of the Bankruptcy Code.). Accord Pressimone v. IRS, 39 B.R. 240 (N.D.N.Y. 1984); In re Gault, 136 B.R. 736 (Bankr. E.D. Tenn. 1991); Goldsby v. United States (In re Goldsby), 135 B.R. 611 (Bankr. E.D. Ark. 1992); Harrison v. IRS (In re Harrison), 82 B.R. 557 (Bankr. D. Colo. 1987).
12 Pressimone v. IRS, 39 B.R. 240 (N.D.N.Y. 1984). Accord Harrison v. IRS (In re Harrison), 82 B.R. 557 (Bankr. D. Colo. 1987).
13 In re Stovall, 209 B.R. 849, 853–54 (Bankr. E.D. Va. 1997) (Fairfax County did not violate codebtor stay by putting a postpetition lien on codebtor’s bank account to secure taxes on the debtor’s car because personal property taxes are not a “consumer debt.” “[T]he majority of courts that have considered the issue have concluded that a debt for unpaid income taxes is not in the nature of a ‘consumer debt’ under § 101(8). These courts reason that a tax liability is imposed, involuntarily, in the course of earning income, and not in any way that could be viewed as ‘consuming.’ . . . [P]ersonal property taxes . . . however, commonly arise as the predictable consequence of a consumer transaction—in this case, the purchase of a car for personal use. . . . While the question is close, the court concludes that a debt for personal property tax is not a consumer debt even where the property being taxed is held for personal, family, or household use. . . . Under § 101(8), a consumer debt is one that is ‘incurred’—implying that some voluntary action is taken before a consumer becomes liable on the debt. . . . A tax, however, is not ‘incurred,’ but rather, is involuntarily imposed by a government for the public welfare. Such public purpose is sufficient, in the court’s view, to take the debt outside the scope of a consumer debt.”).
14 In re Venegas Munoz, 73 B.R. 283 (Bankr. D.P.R. 1987).
15 In re Patti, No. 98-17719 DWS, 2001 WL 1188218, at *4–*5 (Bankr. E.D. Pa. Sept. 14, 2001) (unpublished) (“The proper method in determining whether the debt is ‘primarily for a personal, family, or household purpose,’ is to examine why the debt was incurred. . . . In determining why the debt was incurred, the proper focus is on what the debt was intended to service, not the motivations of the obligee.”).
16 In re O’Dwyer, Bk. No. 380-01570 (Bankr. M.D. Tenn. Nov. 7, 1980).
17 Norman v. Norman, 13 B.R. 894 (Bankr. W.D. Mo. 1981).
18 Frazier v. Bank of Va. (In re Lindamood), 21 B.R. 473 (Bankr. W.D. Va. 1982).
19 In re Nicolas, No. 02-00211, 2002 WL 32332461, at *2–*3 (Bankr. D. Haw. Mar. 22, 2002) (unpublished) (“‘It is settled in this circuit that the purpose for which the debt was incurred affects whether it falls within the statutory definition of “consumer debt” and that the debt incurred for business ventures or other profit-seeking activities does not qualify.’ . . . This ‘profit motive’ rule is the general standard. . . . The determination of whether a debt relates to a personal, family, or household purpose or is motivated by profit-seeking is made at the time the debt is incurred. . . . Debtor purchased the Corolla for use in his driving instruction business, with an eye toward profit. . . . The debt was not incurred for personal, family, or household use and is not a consumer debt.”).
20 In re Izzi, 196 B.R. 727, 731 (Bankr. E.D. Pa. 1996) (Codebtor stay does not protect wife from tort judgment entered in violation of the automatic stay in husband’s prior Chapter 13 case because “[s]uch an obligation is clearly not a consumer debt.”). Accord In re Gorina, 296 B.R. 23, 27 (Bankr. C.D. Cal. 2002) (Judgment for breach of warranty in connection with the purchase of a residence “does not arise out of a consumer debt;” thus, codebtor stay does not protect nondebtor, co-defendants.).