Overcoming the Presumption of Abuse in a Chapter 7 Case
Debtors filing for Chapter 7 bankruptcy are subject to a qualifying “means test.” The purpose of the test is to confirm that the debtor is truly incapable of paying his or her outstanding debts. The means test requires disclosure of the debtor’s income and expenses. If the debtor’s current income is greater than the median in that region, then there is a “presumption of abuse.” That, is the law presumes that the debtor can pay but is unwilling to do so.
Despite failing the means test, the debtor can overcome the presumption of abuse by showing that his or her disposable income is insufficient to pay existing debts. The court examines the debtor’s essential expenses such as food, housing, transportation, health care, insurance and child care. If budgeting those expenses leaves the debtor with little or nothing left to pay creditors, then the court can allow the debtor to move forward under Chapter 7.
If the debtor does not qualify for Chapter 7 because of having excess disposable income, he or she can overcome a presumption of abuse by showing “exceptional circumstances.” There are a multitude of situations that can meet this definition. These are some examples:
- Reduction in income — The Chapter 7 means test looks at the debtor’s income over a short time period of time. Sometimes the debtor’s income decreases after the examination period. This can be due to such occurrences as a job change or loss, a reduction in available overtime or an end of seasonal work. If the higher income during the examination period was an aberration or new circumstances make lower income the new normal, the court may deem the debtor qualified for Chapter 7 bankruptcy.
- Unexpected expenses — Debtors often incur unexpected expenses that greatly impact their family budgets. Medical bills for a recently diagnosed illness or sudden injury are examples. Expenses for casualties such as a home fire or a vehicle loss have also been categorized as exceptional. The court can consider these if they occur after completion of the means test.
- Substantially changed circumstances — Some life events are so disruptive that finances are inevitably impacted for a significant period of time. Divorce or legal separation is a fairly common exceptional circumstance. Having to care for a chronically ill or disabled family member is also a valid exception, as is being called into active military service.
Making a case for these exceptions to the means test requires skill and knowledge of the bankruptcy system. An experienced Chapter 7 bankruptcy attorney can determine if you qualify for this form of debt relief.
The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most highly regarded bankruptcy law firms, dedicated to helping debtors achieve a fresh start. Feel free to contact us online or call 310-271-6223 to schedule an initial consultation.