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.”

Key Takeaways

• A presumption of abuse is the finding that a debtor filing for Chapter 7 bankruptcy is not eligible to do so
• The presumption of abuse aims to identify instances of people abusing the system to file for Chapter 7 bankruptcy when they have the means to pay back their creditors at least partially and should instead file for Chapter 13
• To file for Chapter 7 bankruptcy, a debtor must pass the Chapter 7 means test. If they fail, a presumption of abuse will be found.
• Debtors can rebut the presumption of abuse by demonstrating that there are special circumstances beyond their control that should allow them to file for Chapter 7 bankruptcy

What Is Presumption Of Abuse?

In bankruptcy, a presumption of abuse finding is an alert to the bankruptcy court that a debtor is attempting to file for Chapter 7 bankruptcy when they have the means to file for Chapter 13. 

Explaining the 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.

Presumption of Abuse and the Chapter 7 Means Test

In order to qualify for Chapter 7 bankruptcy, one must pass the Chapter 7 means test. To pass the means test, one must either:

• Make less than the average median income for their state
• Use an additional means test calculation to demonstrate that their disposable monthly income is zero or less than zero by calculating monthly expenses

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.

Rebutting the Presumption of Abuse

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.