What Does Presumption of Abuse Mean in Bankruptcy?

A finding of "presumption of abuse" alerts the bankruptcy court to the fact that a debtor filing a Chapter 7 case has sufficient income to pay into a Chapter 13 repayment plan. (By definition, a Chapter 7 debtor's income is too low to repay creditors.)

Not everyone qualifies for a Chapter 7 bankruptcy, although many prefer to file this chapter, if possible. In a Chapter 7 case, the debtor's household income cannot exceed the state's median income for a family of the same size. However, a filer with a higher than average income can still qualify by taking and passing the "means test" on the official Chapter 7 Means Test Calculation form.

The Chapter 7 means test allows the filer to reduce income by subtracting out necessary expenses. For instance, the debtor can deduct amounts paid for the following:

• taxes
• involuntary payroll deductions
• life insurance
• certain education costs
• childcare expenses
• health care costs, and
• court-ordered payments, such as child or spousal support.

For other expenses, such as housing, utilities, food, and clothing, the debtor must use set amounts determined by national and local standards. The rule prevents a debtor from qualifying by deducting higher-than-average expenses. Otherwise, the bankruptcy system might unfairly reward those who chose to live lavish but unsupportable lifestyles.

Once complete, the means test reveals the debtor's disposable income. If the total disposable income exceeds the threshold amounts established by federal law (the current figures will appear on the form), the debtor fails the test. For bankruptcy relief, the debtor will have to file a Chapter 13 bankruptcy.

A debtor who fails the means test but files a Chapter 7 case anyway must mark a box that states that the presumption of abuse arises. The statement indicates that, due to the outcome of the means test, it's presumed that the debtor is abusing the process (trying to get away with something) by filing a Chapter 7 case instead of paying creditors in a Chapter 13 matter.