Your bankruptcy case may be dismissed on the grounds of “abuse” (Part 1 of 2)
Traditional basis for finding abuse. A chapter 7 case filed by a person with primarily consumer debts may be dismissed, (or converted to a Chapter 13 case with the consent of the debtor) in a situation where the court finds that the granting of relief under chapter 7 would be an abuse of the law. The standard that the courts have traditionally applied under this provision is primarily aimed at examining the debtor’s ability to pay all or a substantial portion of their debt (i.e. in a Chapter 13 case) over a reasonable period of time as an alternative to Chapter 7. Courts frequently will compare the likely result of a hypothetical Chapter 13 case for the debtor in order to determine whether or not an abuse of Chapter 7 is likely to occur. However, the amended bankruptcy law of 2005 has added a whole new dimension to this process. The amended law provides that in certain instances, the court shall presume that abuse exits where the debtor is subject to and fails what has become known as a “means test”.
“Presumption of Abuse”, and the “Means Test”. Thenew bankruptcy law, effective October 17, 2005, has established a mechanical test for determining the special circumstances when “abuse” is presumed to exist in a Chapter 7 filing. The actual rules are extremely complex, and can be found in Bankruptcy Code §707(b). The following is something of an over simplification, but will help you to understand the main elements of how this difficult set of rules is intended to operate:
- Income tables . First, all debtors are divided into two categories: Those with annual income above the median level of income for a similar household in the same state, and those with below the median level of income for a similar household in the same state where the debtor resides. To see the actual tables for these income levels, go to: http://www.usdoj.gov/ust/eo/bapcpa/bci_data/median_income_table.htm
- Below median income . Debtors who have a below average income are subject to an abuse dismissal standard similar to what has been used traditionally. That is, the court will examine the debtor’s income and living expenses to see if the debtor could actually afford to pay all or a substantial portion of their debt over a reasonable period of time. In addition, the court shall consider if the bankruptcy case was filed in “bad faith” and also consider if the “totality of the circumstances of the debtor’s financial situation demonstrates abuse.”
- Above median income . Debtors who have income above the median income level become subject to a “means test” that is determined using a mechanical arithmetical formula to see if the bankruptcy filing is a presumed abuse.
- The means test works this way : A combination of real and hypothetical living expenses is subtracted from the debtor’s current monthly income to determine if the debtor has enough projected disposable income to pay some of their debts.
- Presumption of abuse is automatic for debtors with above median income if they have enough projected disposable income to be able to pay general unsecured creditors:
- At least $10,000 over a period of 60 months;
- At least 25% of such debts if the projected disposable income totals between $6000 and $10,000 over a period of 60 months;
- If the projected disposable income is not enough to pay at least $6000 over a 60 month period, there is no presumption of abuse – However, the debtor may be subject to the other provisions allowing dismissal if the bankruptcy case was filed in “bad faith” and also considering if the “totality of the circumstances of the debtor’s financial situation demonstrates abuse.”
- Current monthly income means all of the debtor’s income received during the last 6 calendar months ending with the month prior to the bankruptcy filing, (but excluding Social Security and income of the debtor’s spouse if it is not shared with the debtor). The projected disposable income is what the debtor has left over after subtracting a certain combination of real and hypothetical living expenses from the debtor’s current monthly income, (see below).
- The “means test” employs a combination of real and hypothetical living expenses to determine ability to pay. If ability to pay is found, then the bankruptcy case is presumed to be an abuse. The hypothetical expenses are taken from the expense standards that are used by the IRS to determine the size of monthly payments that it will collect from delinquent tax payers. To see this in detail, go to http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm
- The finding of presumption of abuse may be overcome by demonstrating “special circumstances.” Special circumstances is defined in the law as “a serious medical condition or a call to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.” In order to establish special circumstances the debtor must provide documentation and a detailed explanation that makes the claimed extra expenses or adjustment of income necessary and reasonable.
Caveat: Over time, the courts will no doubt issue many rulings that define the reach of what is meant by the term “special circumstances.” A sudden job loss or other major income disruption such as serious disease or disability will probably be sufficient to establish inability to pay, provided that the debtor can show convincing evidence that the disruption to income or the extra expense is likely to persist for the foreseeable future and was not created as a bad faith tactic, such as deliberately quitting a job. However, the additional expenses or adjustments to incomeclaimed by the debtor under this section must establish that the debtor’s projected disposable income does not leave enough money to pay the general creditors at least $10,000 over a period of 60 months or at least 25% of such debts if the projected disposable income is between $6000 and $10,000. If the projected disposable income is less than $6000 over the next 60 months, the presumption of abuse will be rebutted.
- These rules are so complicated that a person with above median income should not even think about going into bankruptcy without an attorney who specializes in this field.