A person must meet certain requirements to be eligible to file a Chapter 7 bankruptcy. If a person’s income is above the median income for a household of a similar size in the state in which the person lives, this creates a “presumption of abuse.”
This does not mean that a person cannot file Chapter 7 bankruptcy or that the person has abused the system. It does mean the person must complete some calculations as part of a mandatory means test. The goal is to prove that they do not make enough money to repay their debts as they would have to in a Chapter 13 bankruptcy. This is required by the law to prove that the person is not taking advantage of the bankruptcy process to avoid repaying debts when they are financially able to do so.
Many people who file Chapter 7 bankruptcy get to walk away from their debts without losing any of their property, such as their home. This result is so advantageous to a debtor that some people might try to take advantage of this particular form of bankruptcy even though they do not in fact qualify for it. This is why there are special protections in place to prevent people from abusing the Chapter 7 bankruptcy process. One of these protections is the presumption of abuse.
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), debtors are required to complete a means test in order to file a Chapter 7 bankruptcy. If the debtor fails the means test, the court presumes that the debtor is attempting to abuse the bankruptcy process to avoid paying legal debt that they are capable of paying. If the presumption of abuse holds, the debtor’s case is either converted to a Chapter 13 bankruptcy or dismissed.
How Does the Chapter 7 Means Test Work?
The Chapter 7 bankruptcy means test has two parts. In the first part, a person calculates their current average monthly income using the “Chapter 7 Statement of Your Current Monthly Income” form. A person then must compare their current monthly income to the median income of a household of similar size in their state. The U.S. Trustee Program maintains a special database that shows median family household income in each state.
If a person’s current monthly income is equal to or less than the median income of a household of similar size in their state, then there is no presumption of abuse in their case. In other words, the person has qualified to proceed with a Chapter 7 bankruptcy. But if a person’s current monthly income exceeds the median income of a household of similar size in their state, then they must make additional means test calculations to determine whether they can file a Chapter 7 bankruptcy.
If a person’s income proves to be more than the median income for their state, the person can still overcome a presumption of abuse by showing that they do not have enough disposable income to repay even a portion of their debts, as would be required in a Chapter 13 bankruptcy.
To show this, a person would have to complete the second part of the means test on the “Chapter 7 Means Test Calculation” form. On this form, a person calculates certain allowable deductions, which are their necessary expenses. Those expenses are subtracted from the person’s income to determine how much, if any, monthly disposable income they have. Disposable income is income that is not committed to the payment of monthly expenses, e.g. the person’s mortgage payment, car payment, auto insurance payment and the like.
If a person has a negative disposable income or an amount that is close to zero, then the presumption of abuse would probably not apply, and the person would probably qualify to proceed with a Chapter 7 bankruptcy. If a person has an amount of disposable income every month, they would in all likelihood be directed to file a Chapter 13 bankruptcy petition rather than a Chapter 7.
Is Anyone Exempt from Taking the Means Test?
Although most people who file for Chapter 7 bankruptcy must complete the means test, there are two exceptions:
- If a person’s debts are primarily business debts and not consumer debts, then the person is not required to complete the means test. Business debts must be debts incurred in the course of starting or operating a business. This includes things such as purchasing inventory or leasing office space. To claim this exemption, more than 50% of all of a person’s debts must be business debts;
- Disabled military veterans whose debts were incurred while they were on active duty are not required to complete the means test. But the veteran must have at least a 30% disability rating. Also, people in the military reserves who filed for Chapter 7 bankruptcy before being called to active duty are given a temporary exception from completing the means test. This lasts for as long as 540 days or until 14 days after their active duty service ends.
How Is the Presumption of Abuse Rebutted?
Again, under the BAPCPA, the debtor has the burden of showing that the debtor is not abusing the bankruptcy system. To avoid the presumption of abuse, a debtor must show that special circumstances caused the debtor to assume the debt they have. Special circumstances are situations which leave the debtor with no reasonable alternative but to take on debt. An example would be a person who must borrow money to pay for necessary medical or dental care.
If the debtor successfully rebuts the presumption of abuse, the bankruptcy court will allow the debtor to continue with their Chapter 7 bankruptcy.
What Are Acceptable Special Circumstances?
The BAPCPA does not give an exact definition of “special circumstances” which can rebut the presumption of abuse. It only says that debtors must have had no reasonable alternative to incurring the debt. The following reasons for accumulating debt qualify as special circumstances under the BAPCPA:
- Serious medical conditions requiring treatment;
- Active military duty.
The list is not exhaustive, so there may be other special circumstances which could justify a debtor’s debt and rebut the presumption of abuse. Again, special circumstances rebut the presumption of abuse and would justify a person being able to continue with a Chapter 7 bankruptcy petition.
What Do I Do If I Cannot File a Chapter 7 Bankruptcy?
If a person does not pass the means test for filing a Chapter 7 and cannot rebut the presumption of abuse, then the person cannot file a Chapter 7 bankruptcy. A person might fall within an exception or be able to claim special circumstances, but if not, again the person then cannot file a Chapter 7 bankruptcy.
If the person still needs bankruptcy protection, they can convert their case to a Chapter 13 bankruptcy. A Chapter 13 bankruptcy does not discharge a person’s debt as a Chapter 7 does.. Instead, their debts are reorganized. Reorganization typically involves consolidating all of a person’s debts and reducing some of them. Reorganization results in a monthly repayment plan. The idea is that a person has enough disposable income to repay all or at least part of their debt in some manner, so it would not be fair to simply eliminate all of it as is allowed in a Chapter 7 bankruptcy.
Instead, a debtor is allowed to repay their debts over a period of three to five years. During this period the person still has the protection of the bankruptcy court with the automatic stay. So, a person’s creditors cannot pursue their debts or harass the person as long as the person makes all of their required payments. Then, at the end of the repayment plan period, any remaining debts that are eligible for discharge can be discharged.
Do I Need a Lawyer?
Success in rebutting the presumption of abuse is key to filing a Chapter 7 bankruptcy. It is important to consult an experienced bankruptcy lawyer when you are considering filing for bankruptcy. An experienced bankruptcy attorney can help protect your assets, and make the entire bankruptcy process as painless and efficient as possible.