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Abuse Issues

If a person intends to file for bankruptcy it is only natural to be concerned about whether his/her bankruptcy case is going to be approved by the Court.

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) passed by the United States Congress in 2005 makes bankruptcy filings more difficult as it restricts the number of debtors that can declare Chapter 7 bankruptcy.   Post  BAPCPA, Bankruptcy cannot be an excuse to avoid one’s debts.  Prior to the BAPCPA Amendments, debtors of all incomes could file for bankruptcy under Chapter 7 under which most debts are forgiven or discharged.  The new law requires the debtors to file a Chapter 13 Bankruptcy in which debts incurred are discharged only after the debtor has repaid some portion of the debts.

11 U.S.C. § 707(b) provides two definitions of abuse. Abuse may be found through a finding of bad faith, determined by a totality of the circumstances or when there is an un-rebutted presumption of abuse arising under a BAPCPA-created “means test.”

A presumption of abuse arises in a Chapter 7 filing if the debtor’s income is above the median income for a similarly-sized household and the debtor cannot “pass” the means test. The first prong of this test is very mechanical. It simply looks at the debtor’s income over the last six months, multiply it by two, and compare the resulting annual income to the median.  If the debtor’s income is below the median, the case is not presumed to be an abuse of the bankruptcy system.  Monthly income is defined in 11 U.S.C. § 101(10A) as the monthly average of the income received by the debtor and the debtor’s spouse in a joint case during a defined six-month time period prior to the filing of the bankruptcy case.

However, if the debtor’s income is above the median, s/he needs to take the means test. The means test is essentially a set of deductions Congress has decided debtors are allowed to subtract from the income. After taking all the deductions, if the debtor has more than approximately $115 left over and can pay back 25% of the amount s/he owes to his/her unsecured creditors over 60 months, the case is presumed to be abusive.

If a presumption of abuse is found under the means test, it may only be rebutted in the case of special circumstances.  If the debtor files a statement rebutting the presumption,   the U.S. Trustee’s Office reviews the case and asks the Court to dismiss the case or require the debtor to convert the case to a Chapter 13. If the Trustee’s office finds that the case is not abusive, it will allow the debtor to proceed under Chapter 7.

Inside Abuse Issues