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". The new 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:
Income Tables
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:
oAt 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; o 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 income claimed 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.
Next Page >>>>>
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Bankruptcy Still
Works
BAYER, WISHMAN & LEOTTA
Attorneys at Law
888 S. Figueroa Street, Suite 1970
Los Angeles, CA 90017
213-629-8801
www.debt-relief-bankruptcy.com
email at:
info@debt-relief-bankruptcy.com
Reprinted with permission.
