Wow this sounds serious, doesn't it? Filing a Chapter 7 case under a cloud is serious, but it is not impossible to overcome the "presumption of abuse".

CONGRESS PASSED THE MEANS TEST TO DISCOURAGE CHAPTER 7 CASES

In 2005 Congress decided to overhaul the bankruptcy laws. At the time, Congress was concerned that too many people were filing Chapter 7 bankruptcy and discharging debts that they could afford to pay, either outside of bankruptcy or through a Chapter 13 repayment plan.

 As a part of that overhaul, called the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA for short), Congress instituted some provisions that were designed to discourage filers who could still make payments on their unsecured debts, like medical bills, payday loans and credit card balances. One of those provisions instituted what we call the Means Test.

To learn more about the the Means Test see:

The (Can I File Bankruptcy) Means Test and 

The Means Test - How it Works

THE PRESUMPTION OF ABUSE IN A CHAPTER 7 CASE

The Means Test is a form and a calculation designed to determine if you have any money left over at the end of the month to devote to that unsecured debt. If you do, the bankruptcy laws expect that you will either file a Chapter 13 case instead, and use the Chapter 13 payment plan to pay your unsecured debt, or you will not file bankruptcy at all.   

If you decide to go forward with a Chapter 7 case anyway, you are doing so under the "presumption of abuse." According to the results of the Means Test, there is a presumption that you can afford to pay at least a part of your unsecured debt.

Choosing to go forward under Chapter 7 could therefore mean that you are abusing the bankruptcy system.

PRESUMPTION OF ABUSE DOES NOT PREVENT FILING A CHAPTER 7 CASE

People pass or fail the Means Test for one of two reasons. Either their income is too high, or their expenses are not reasonable and necessary for their family's well being. 

If the presumption of abuse arises under the Means Test calculation, it does not mean that you have "failed" anything. And, it does not mean that you are prohibited from filing a Chapter 7 case. Even if the Means Test indicates that you have disposable income that you could use to make a Chapter 13 payment, there may be good reasons for you to continue under Chapter 7. The bankruptcy court has the discretion to allow the case to continue, but it will normally require that you provide a detailed explanation of your special circumstances and documentation to back it up.

THE MEANS TEST FORMS

The forms can be found at these links:

Chapter 7 Statement of Current Monthly Income and Means-Test Calculation (B22A)

Chapter 11 Statement of Current Monthly Income (B22B)

Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (B22C)

ACCOUNT FOR ALL OF YOUR ALLOWABLE EXPENSES

The Means Test form itself does provide for some unusual expenses. Here are some examples:

• Tuition and other expenses for your child's education if she has to go to a special school because she is physically or mentally challenged.
• Out of pocket health care expenses.
• Telecommunications services, like pagers, call waiting, caller id, special long distance or internet service to the extent necessary for your health and welfare or that of your dependents.
• Your reasonable and necessary expenses associated with the care of elderly, chronically ill or disabled family members.
• Monthly expenses incurred to maintain the safety of your family under federal laws, like the Family Violence Prevention and Services Act.
• Excessive home energy costs. 

For some people, accounting for these unusual expenses may be enough to move you from the "fail" to the "pass" column. 

FILING A CHAPTER 7 UNDER A PRESUMPTION OF ABUSE

If you file a Chapter 7 case after the presumption of abuse arises because of the Means Test calculation, your trustee or the US Trustee's office will pay particular attention to your case. Under BAPCPA, the debtor has the burden of proving that he is not abusing the bankruptcy system. That usually means that the debtor must show that he is the victim of special circumstances. These special circumstances cause the debtor to incur expenses that he has no reasonable alternative but to pay.

You will be given an opportunity to state your case, either at your Meeting of Creditors with the Trustee or at a hearing held before the bankruptcy judge. To overcome (or rebut, as we lawyers say) the presumption, you will probably need to provide information beyond what is required by the Means Test form. 

Start with the form itself. Part V of the form provides a place where you can set forth any "special circumstances that justify additional expenses for which there is no reasonable alternative."

In Part VI, the Means Test calls for a listing of any "monthly expenses, not otherwise stated in this form, that are required for the health and welfare of you and your family that you content should be an additional deduction from your current monthly income. 

SPECIAL CIRCUMSTANCES

These special circumstances and additional expenses often arise out of the following:

• Serious medical conditions
• Being called to active military duty
• Recent job loss, income reduction, layoff or forced retirement
• Expenses for a non-filing spouse, such as credit obligations
• Recent marital separation or divorce
• Some courts have found that paying students loans -- not accounted for on the Means Test form -- is a special circumstance. Other courts have reached the opposite conclusion.

IF THE COURT DOES NOT AGREE

If the trustee or the US Trustee's office does not agree with your decision to proceed under Chapter 7, they will file a motion to dismiss your case. The bankruptcy court will have to decide whether it is appropriate to allow you to obtain a Chapter 7 discharge. If the bankruptcy court does not agree that you present special circumstances, you still have options: 

you can allow your case to be dismissed and wait until your financial picture changes and you can pass the Means Test, or 

you can convert your case to a Chapter 13 case and set up a payment plan.  

Your best choice depends on your personal circumstances. If your income has drastically changed during the six month look back period, waiting a few months to refile may be the answer.

If you failed the Means Test because your expenses are too high, it may be time to rethink your expenses in comparison to other families similarly situated. 

Keeping in mind that a Chapter 13 plan does not necessarily require you to pay 100% of your unsecured debt before you are discharged of it, may make it easier to consider a Chapter 13 plan.