Presumption of Abuse in Bankruptcy: What It Means

Many people who file Chapter 7 bankruptcy walk away from their debts completely. They get a fresh start without losing any property. As you can imagine, some people might try to take advantage of this outcome. Special rules prevent people from unfairly using the Chapter 7 bankruptcy process. One of these rules is the presumption of abuse.

If your current monthly income exceeds the income limit for Chapter 7, a presumption of abuse exists. The term sounds harsh, but it’s just a technical flag. You can still file Chapter 7 bankruptcy. You’ll just need to complete additional calculations to prove you qualify.

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Worried about the presumption of abuse? A bankruptcy attorney can review your income, calculate your means test, and help you understand whether Chapter 7 or Chapter 13 fits your situation.

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Understanding the Presumption of Abuse

When you apply for Chapter 7 bankruptcy, you’ll take something called the means test. The test examines your income, expenses, and other financial details. If it shows you have enough disposable income to pay back some debts, the court may flag a presumption of abuse.

The court isn’t accusing you of fraud. The presumption simply means Chapter 7 might not fit your situation. You may be able to repay your debts through Chapter 13 instead. Chapter 13 involves a repayment plan over three to five years.

Two important facts about this presumption:

You can challenge it. A presumption is just an assumption, not a final decision. You’ll have the chance to show the court that special circumstances apply. If you can explain why the means test doesn’t reflect your true financial picture, the court may still allow Chapter 7.
It’s not about wrongdoing. A presumption of abuse isn’t an accusation. The court just needs more information before deciding if Chapter 7 fits your situation.

Why the Presumption of Abuse Exists

The presumption ensures that only people who truly need debt relief through Chapter 7 can use it.

Chapter 7 is meant for individuals and families who genuinely can’t afford to pay back their debts. Congress changed bankruptcy laws in 2005 to help prevent fraud and misuse. One of the biggest changes was adding the means test.

The means test compares your income to the median income for a household your size. Each state has different median income levels. If your income exceeds that amount, the court assumes you have disposable income. You may be able to repay at least some of what you owe.

If the court finds your income too high, you may not qualify for Chapter 7. Many people in this situation explore Chapter 13 bankruptcy instead. You can speak with a bankruptcy attorney for free to understand which option fits your situation.

How the Means Test Works

The Chapter 7 bankruptcy means test is a two-part income limit test. In the first part, you calculate your average income from the past six months. You’ll compare your income to the median income for your household size in your state.

The United States Trustee Program maintains a database showing median family household income by state. You can find these numbers online to see where you stand.

If your current monthly income equals or falls below the median income, there’s no presumption of abuse. You pass the Chapter 7 means test. You can proceed with your bankruptcy filing.

But if your current monthly income exceeds this threshold, you must complete additional means test calculations. These calculations determine whether you can still file Chapter 7 bankruptcy.

Part 2 of the Means Test

If your income exceeds the median income for your state, you can still qualify. You’ll need to show you don’t have enough disposable income to repay debts through Chapter 13.

To prove this, you’ll complete the second part of the means test. On the Chapter 7 Means Test Calculation form, you’ll calculate certain allowable deductions. These deductions are expenses that get subtracted from your income. The result shows how much monthly disposable income you have.

If you have negative disposable income or a number close to zero, there likely won’t be a presumption of abuse. You probably qualify to file Chapter 7. If you have significant disposable income, you’ll probably need to file Chapter 13 instead.

Who Must Take the Means Test?

Most individuals who file for Chapter 7 bankruptcy must complete the means test. However, two exemptions exist:

Business debts: If your debts are primarily business debts, you don’t need to complete the means test. Business debts must be incurred as part of starting or operating a business. Examples include purchasing inventory or leasing office space. More than 50% of all your debts must be business debts to claim this exemption.
Disabled military veterans: Veterans whose debts were incurred while on active duty aren’t required to complete the means test. You must have at least a 30% disability rating. Military reservists who filed Chapter 7 before being called to active duty get a temporary exception. The exception lasts up to 540 days or 14 days after their active duty service ends.

If one of these exemptions applies, you’ll claim it on the Statement of Exemption for Presumption of Abuse form. You should consult a bankruptcy attorney for help with these exemptions.

Special Circumstances That Override the Means Test

If you don’t pass the Chapter 7 means test, you might still be able to file. Special circumstances must apply to your situation. These are rare, unexpected events outside your control that significantly affect your finances.

In this case, you’ll need to retake the means test and explain why it should be adjusted. You can ask the court to let you deduct extra expenses. You can also request to change how your income is calculated because of these special circumstances. You’ll need to show proof and get court approval before moving forward.

Common examples of special circumstances include:

A serious or long-term medical condition
Being called to active duty military service
Job loss or income reduction
Natural disasters affecting your home or business

Because this process is more complex, you should speak with a bankruptcy attorney for free if you’re relying on special circumstances to qualify for Chapter 7.

Filing Chapter 13 Instead of Chapter 7

If you can’t pass the means test and exceptions or special circumstances don’t apply, you can’t file Chapter 7 bankruptcy. But if you still want to file bankruptcy, the bankruptcy court may convert your case to Chapter 13.

A Chapter 13 bankruptcy doesn’t liquidate or discharge your debt immediately. Instead, your debts are reorganized. Reorganization typically involves consolidating all your debts while reducing some of them. You’ll also create a monthly repayment plan. The idea is that you have enough disposable income that walking away from all debts wouldn’t be fair.

Instead, you’re allowed to repay at least some debts over three to five years. During this period, you’re still under bankruptcy court protection with the automatic stay. Your creditors can’t pursue their debts or harass you as long as you make required payments. At the end of the repayment plan period, any eligible debts that remain can be discharged.

Frequently Asked Questions

What is the presumption of abuse in Chapter 7 bankruptcy?

The presumption of abuse is a technical flag that appears when your income exceeds your state's median income for a household your size. It means you must complete additional means test calculations to prove you qualify for Chapter 7. The presumption isn't an accusation of wrongdoing. It simply requires you to show you don't have enough disposable income to repay your debts.

How do I overcome the presumption of abuse?

You overcome the presumption by completing Part 2 of the means test. You'll calculate allowable deductions and expenses to show your actual disposable income. If your disposable income is negative or close to zero, you can still qualify for Chapter 7. You can also present special circumstances to the court that justify adjusting the means test calculations.

Can I file Chapter 7 if I fail the means test?

If you fail the means test and can't overcome the presumption of abuse, you generally cannot file Chapter 7. However, you can file Chapter 13 bankruptcy instead. Chapter 13 creates a repayment plan over three to five years. After completing the plan, remaining eligible debts can be discharged.

What happens if I have a presumption of abuse?

If a presumption of abuse exists, you must complete additional calculations to prove you qualify for Chapter 7. You'll document your expenses and show you lack disposable income to repay debts. The bankruptcy trustee may also review your case more closely. If you can't overcome the presumption, your case may be converted to Chapter 13 or dismissed.

Who is exempt from the bankruptcy means test?

Two groups are exempt from the means test. First, people whose debts are primarily business debts don't need to complete it. More than 50% of your total debts must be business-related. Second, disabled military veterans with at least a 30% disability rating whose debts were incurred on active duty are exempt. Military reservists called to active duty get a temporary exemption.

What Is the Presumption of Abuse in Bankruptcy?