Presumption of Abuse
In 2005, the United States congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) which substantially limited the number of debtors who could file for Chapter 7 Bankruptcy.
Presumption of Abuse
Prior to this act, most filers of all incomes had little difficulty eliminating most of their unsecured debt by filing Chapter 7 Bankruptcy. The means test was created to stop debtors who were "abusing the system" and who could repay a portion of their debts by filing Chapter 13 Bankruptcy. Under 11 U.S.C. § 707(b) Chapter 7 Bankruptcy can be converted or dismissed, if after completing the means test, there exist a "unrebutted presumption of abuse" or on general grounds, including bad faith, determined under the totality of the circumstances (§ 707(b) (3)).
The BAPCPA created a process to identify abusers. The first step in the process was to evaluate a debtor's income by comparing it to the state median income where the debtor resides. If the debtor's income is below the median income for the state in which they reside under most circumstances the debtor can file Chapter 7 Bankruptcy. If the debtor's current monthly income is higher than the median income of the state in which they reside, the debtor must complete an additional "means test". Debtors whose income is above the state median income level may eventually be able to file Chapter 7 Bankruptcy, but they must pass the means test.
Evaluation a debtors income through the means test
The means test evaluates a debtor's monthly income to find out the total amount of disposable income the debtor will have over the next five years. If the debtor has less than $6,000 the means test is over, there is no presumption of abuse and the debtor may file Chapter 7 Bankruptcy. If the debtor has more than $10,000 there is a presumption of abuse and the debtor can not file Chapter 7 Bankruptcy. If the amount of disposable income is between $6,000 and $10,000 the debtor's disposable income is compared to the amount of their non-priority unsecured debt. For example, if the debtor has a current monthly income (over 60 months) which is less than $10,000 but greater than $6,000 and is less than 25% of the debtor's non-priority, unsecured debt, presumption of abuse does not arise and the debtor may be able to make a case for filing Chapter 7 Bankruptcy.
More Help on Presumption of Abuse
- Debtor - A debtor is an entity or person who owes a debt or a service to another person or entity which can also be called a Creditor. - read more
- Means Test - The means test, which is outlined in Section 707(b)(2) of the Bankruptcy Code, makes it more difficult for individuals to have their debts discharged through Chapter 7 Bankruptcy. - read more
- Unsecured Claim - An unsecured claim is a claim which is not backed by any collateral and which the creditor has no assurance of payment if the debtor defaults on their debt payments. - read more