Bankruptcy and Presumption of Abuse

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Prior to enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), there was a presumption in favor of granting a discharge to the debtor.  The BAPCPA did away with that presumption in an effort to make it more difficult for debtors to obtain a discharge.  

Presumption of Abuse

To qualify for Chapter 7 relief, a debtor must satisfy the median income test or the means tests.  The median income test requires a debtor to demonstrate that his total household income is less than or equal to the median income for a family of the same size in his state.  If a debtor satisfies the median income test, he is eligible to file a Chapter 7 case. 

If a debtor is unable to pass the median test, he must pass the means test to be eligible to file a Chapter 7 bankruptcy.  The means test is the method established under the BAPCPA to determine whether the filing of a Chapter 7 case amounts to an abuse by the debtor of the bankruptcy process.  If a debtor cannot pass the means test, he must file a Chapter 13 case or convert to Chapter 13 if the Chapter 7 case has already been filed.  A debtor who cannot pass the means test also has the option of dismissing the Chapter 7 case. 

The presumption of abuse under the means tests arises if the debtor has at least $166.67 in net monthly income or $10,000 projected over a five year period available for payment to general unsecured creditors.  On the other hand, the presumption of abuse does not arise if the debtor has less than $100 in net monthly income or $6000 projected over a five year period for payment to unsecured creditors.  If the debtor falls between these two extremes, abuse is presumed only if his projected net monthly income is sufficient to pay at least 25% of general unsecured claims over a five year period. 

Presumption of Bad Faith  

Even in an instance where a debtor has overcome the presumption of abuse, his case may still be dismissed if the court finds that it was filed in bad faith.  If the case is not dismissed, the court may terminate, modify, or lift the automatic stay.  Such action by the court would expose the Chapter 7 or Chapter 13 assets of the debtor to the collection efforts of their creditors. 

Getting Legal Help

Whenever a debtor is faced with a motion to dismiss based on a presumption of abuse or bad faith, he has the opportunity to fight the dismissal.  However, successfully rebutting the presumption of abuse or bad faith can be very complex and technical.  Therefore, it’s best to hire a qualified bankruptcy attorney.