The Bankruptcy Alphabet – A is for Abuse

A group of bankruptcy attorneys from all over the United States have started blogging about the “Bankruptcy Alphabet.” I decided to join in, so here is my first contribution: A is for Abuse.

I’m not talking about abusive debt collectors. I’m talking about the presumption of abuse that arises in some Chapter 7 bankruptcy cases. In short, a presumption of abuse arises if the debtor’s income is above the median income for a similarly-sized household AND the debtor cannot “pass” the means test.

The first prong of this test is very mechanical. We simply look at the debtor’s income over the last six months, multiply it by two, and compare the resulting annual income to the median. In Wisconsin, the median income for a household of four is $76,000. Social Security income is not included in this calculation, but most other forms of income are included. If the debtor’s income is below the median, the case is not presumed to be an abuse of the bankruptcy system.

If the debtor’s income is above the median, we need to go to the second prong of the test, the means test. The means test is essentially a set of deductions Congress has decided debtors are allowed to subtract from the income that was calculated in the preceding paragraph. After taking all the deductions, if the debtor has more than approximately $115 left over AND could pay back 25% of the amount he owes to his unsecured creditors over 60 months, the case is presumed to be abusive.

If a Chapter 7 case is presumed to be an abuse of the system, the debtor can file a statement rebutting that presumption. The U.S. Trustee’s Office will then review the case and either (1) ask the Court to dismiss the case or require the debtor to convert the case to a Chapter 13 or (2) agree that the case is not abusive and should be allowed to proceed under Chapter 7.

This is a simplified version of the means test and question of abuse. If you have general questions about the presumption of abuse in Chapter 7 cases, please post them in the comments below and I’ll answer them as best I can. If you have specific questions about your individual situation, contact your local bankruptcy attorney.

Bankruptcy attorneys from around the country are taking part in this “Bankruptcy Alphabet” exercise. Please take a few minutes to check out these other blog posts on the letter “A.”

Abandonment – by New York Bankruptcy Lawyer, Jay S. Fleischman
Abuse of Bankruptcy – by Pittsburgh Bankruptcy Attorney, Shawn N. Wright
Address – by Tuscaloosa/Birmingham Bankruptcy Lawyer, Melinda Murphy Dionne
Advantages of Filing – by Columbus, Ohio Bankruptcy Lawyer, Athena Inembolidis
Adversary Proceeding – by Philadelphia Bankruptcy Lawyer, Kimberly Coleman
Alimony – by Philadelphia Suburban Bankruptcy Lawyer, Chris Carr
Allowance – by Westlake Bankruptcy Attorney William Balena
Application – by Lakewood, CA Bankruptcy Attorney, Christine A. Wilton
Arrest – by Cleveland Area Bankruptcy Attorney Bill Balena
Ask – by San Francisco Bankruptcy Attorney, Jeena Cho
Assets – by Hawaii Bankruptcy Attorney, Stuart Ing
Assets – by Marin County Bankruptcy Attorney, Catherine Eranthe
Assets – by Metro Richmond Bankruptcy Attorney, Mitchell Goldstein
Assume – by Northern California Bankruptcy Lawyer, Cathy Moran
Assumption – by Los Angeles Bankruptcy Lawyer, Mark J. Markus
Assumption – by Taylor Michigan Bankruptcy Attorney, Christopher McAvoy
Assumptions – by Newnan, Georgia Bankruptcy Lawyer, Rick Palmer
Attachment – by Vermont/New Hampshire Bankruptcy Lawyer, Michelle Kainen
Attorney – by Daniel J. Winter, Chicago Bankruptcy Attorney
Automatic Stay – by Connecticut Bankruptcy Lawyer William E. Carter
Automatic Stay – by Omaha/Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
Automatic Stay – by Chicago Bankruptcy Attorney, Kyle A. Lindsey
Automatic Stay – by Livonia Michigan Bankruptcy Attorney, Peter Behrmann
Automatic Stay – by Birmingham Bankruptcy Attorney, Elizabeth Johnson
Automatic Stay – by Houston Bankruptcy Attorneys, Busby & Associates
Automobiles – by Colorado Springs Bankruptcy Lawyer Bob Doig
Avoidance – by Ormond Beach Bankruptcy Attorney, Lewis Roberts
Avoidance of Preferential Transfers – by St. Louis, Missouri Bankruptcy Attorney, Nancy Martin