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How do courts determine presumptive abuse?

On Behalf of | Oct 7, 2019 | Chapter 7, chapter 7 bankruptcy | 0 comments

Courts are not always quick to grant Chapter 7 bankruptcy. One of the reasons is that bankruptcy courts are concerned about people abusing the Chapter 7 process by using liquidation to avoid paying off debts. If a Chapter 7 filer in Kentucky possesses income that is high enough to pay off debts under a possible Chapter 13 bankruptcy or if debt can be paid under other alternatives, a court may find that a presumption of abuse exists.

The U.S. Courts website explains that courts may dismiss a Chapter 7 filing for a number of reasons. The bankruptcy filer may have a steady income and still stands a chance of paying off outstanding debts if creditor efforts to collect outstanding payments are halted for a period of time under Chapter 13 bankruptcy. Courts might also dismiss a Chapter 7 filing if it comes from a business owner whose business has incurred mostly consumer debt and not business debt.

Chapter 7 filers can also fail income requirements. In the event a filer has a monthly income that exceeds the state median income, the filer will be subjected to a means test to find out if the filing is an abuse of Chapter 7. Courts may presume abuse if the filer, over the course of five years, has an aggregate monthly income that exceeds $12,850 or 25% of non-priority unsecured debt, which should amount to at least $7,700.

This does not mean that a Chapter 7 filer is left with no recourse if the means test is failed. It is possible to counter an argument of presumptive abuse by demonstrating that added expenses or adjustments of current monthly income are justified by specific circumstances. However, if these arguments are not accepted, a court will reject the Chapter 7 filing, or, if the filer consents, convert the case to Chapter 13.

Since a means test is a crucial phase in a Chapter 7 case, consultation with a bankruptcy attorney can help keep the bankruptcy filing on track, or you might be advised of other alternatives to Chapter 7 that suit your case better. Keep in mind that this information is presented as education and not as a substitute for the advice of an attorney.