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While every American has the right to file a Chapter 7 bankruptcy, being granted a discharge in a Chapter 7 bankruptcy is a privilege and not a right. There are specific income requirements you must fall within in to be eligible for a Chapter 7 discharge. If your current monthly income exceeds these limits, then a presumption of abuse exists in your bankruptcy case.
This article will explain what the presumption of abuse is, why it exists, and how it can be overcome. Finally, we take a brief look at what it means to file Chapter 7 even though a presumption of abuse exists in your Chapter 7 bankruptcy case.
Chapter 7 bankruptcy
Chapter 7 bankruptcy is a legal procedure set out in federal law that allows individuals who can no longer afford to pay their bills to eliminate their debts. And, while it is rare, in exchange for having their debts discharged the individual is required to surrender any unprotected property they own to be sold to pay creditors. Most individuals who file a Chapter 7 bankruptcy are not required to give up any of their assets due to the generous exemptions that allow them to protect certain property. Exemptions are based on federal bankruptcy law or state law, depending on where the filer lives.↑ Back to top
Because Chapter 7 is only intended for individuals and families who can no longer afford to pay their bills, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 changed federal bankruptcy law by adding the requirement that every individual filing a Chapter 7 bankruptcy complete “means testing.” Means testing is a threshold test that compares your household income to the median household income of a similar-sized family in the state that you reside in. Means testing was created to prevent bankruptcy fraud and to ensure that only those individuals who truly could no longer afford to pay their bills are able to take advantage of Chapter 7 bankruptcy.↑ Back to top
The Chapter 7 bankruptcy means test is a two-part income limit test. The United States Trustee Program maintains a database of the median family household income by state. If your current monthly income is equal to or less than the median income of a similar-sized household in your state, then there is no presumption of abuse in your case and you do not need to do anything further. If your current monthly income exceeds this threshold, then additional calculations are necessary to determine whether you’re able to file a Chapter 7 bankruptcy.↑ Back to top
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Means Test Calculation
If your income is over the median income for your state, you can still overcome a presumption of abuse by completing the second part of the means test onForm 122A-2, Chapter 7 Means Test Calculation. The means test calculation calculates your disposable income over a five year period. If your total disposable income is $8,175 or less over 5 years (or less than $137 per month), then there is no presumption of abuse even though you make more than the median and you may file your Chapter 7 bankruptcy.↑ Back to top
Means Test Exceptions
Although most individuals who file Chapter 7 bankruptcy must complete the means test, there are some exceptions. If your debts are primarily business (called non-consumer) debts, then you are not required to complete the means test. Business debts must be debts incurred as part of starting or operating a business such as purchasing inventory or leasing office space. In addition, more than 50% of all your debts must be business debts. Disabled military veterans whose debts were incurred while on active duty are also not required to complete the means test. However, you must have at least a 30% disability rating. Finally, reservists who filed for Chapter 7 bankruptcy prior to being called to active duty are granted a temporary exception from completing the means test for up to 540 days or 14 days after their active duty service ends. Whichever exception you believe applies to you must be claimed on Bankruptcy Form 122A1-Supp,Statement of Exemption for Presumption of Abuse.↑ Back to top
If you are required to complete the means test and do not pass it, you can still file Chapter 7 bankruptcy with the presumption of abuse by showing the court that special circumstances exist in your case. Special circumstances are unanticipated situations beyond your control that justify allowing you to deduct additional expenses or make additional adjustments to your current monthly income on the means test. Two specific types of special circumstances include a serious medical condition and being called to active duty service in the military. If you request special circumstances to pass the means test, your request must be approved by the court.↑ Back to top
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If you are unable to pass the Chapter 7 means test, the bankruptcy court may require that your case be converted to Chapter 13. A Chapter 13 bankruptcy does not liquidate your debt. Instead, your debts are reorganized. Reorganization typically involves consolidating all your debts, while reducing some of them, and creating a monthly repayment plan. The idea is that you have enough disposable income that it wouldn’t be fair for you to walk away from your debts completely as part of a Chapter 7. Instead, you’re given the opportunity to repay at least some of your debts over five years. During this period you are still under the protection of the bankruptcy court and your creditors are prohibited from pursuing or harassing you as long as you make all of your required payments.↑ Back to top
Getting More Help
If you still have questions about Chapter 7 bankruptcy, you can find other helpful articles in Upsolve’s Learning Center. In addition, if you qualify, Upsolve can help you file a Chapter 7 bankruptcy for free or put you in touch with an experienced bankruptcy attorney to discuss the specifics of your case.↑ Back to top