If a debtor filing for Chapter 7 bankruptcy fails the means test, a presumption of abuse will be found. In this article, we’ll define the term “presumption of abuse.”
Chapter 7 bankruptcy is intended for debtors who do not have the ability to pay back their creditors. Debtors filing for Chapter 7 bankruptcy have all eligible debts discharged and an automatic stay put it into place to stop creditors’ collection efforts.
In contrast, Chapter 13 bankruptcy is for debtors with average income and is intended to help debtors come up with a plan to pay back some or all of their debts.
Generally speaking, people prefer to file for Chapter 7 bankruptcy, which is why the bankruptcy court is careful to try to identify instances of people abusing the system and filing for Chapter 7 when they do not qualify.
In order to qualify for Chapter 7 bankruptcy, one must pass the Chapter 7 means test. To pass the means test, one must either:
If a debtor does not pass the Chapter 7 means test, a presumption of abuse exists in their case. This means that it is presumed that they are abusing the process by filing for Chapter 7 instead of Chapter 13. If the presumption is true, the debtor will be required to file for Chapter 13 instead and create a repayment plan.
While it may sound quite harsh, a presumption of abuse is not equivalent to bankruptcy fraud. It is simply a statement that the debtor is most likely ineligible for Chapter 7 and should instead file for Chapter 13.
Note that the presumption of abuse is only presumed. This means that debtors have the opportunity to rebut a presumption of abuse by identifying special circumstances or exceptions that should qualify them for Chapter 7 bankruptcy.
Special circumstances are unanticipated situations beyond the debtor’s control that justify deducting additional expenses or making additional adjustments to their monthly income on their additional means test calculation. Examples of special circumstances include serious medical conditions and active duty in the Armed Forces.