Legal Definitions - presumed abuse

Presumed abuse, or the presumption of abuse, is a legal concept primarily found within bankruptcy law, specifically concerning Chapter 7 bankruptcy filings.

It arises when an individual seeking to file for Chapter 7 bankruptcy appears to have sufficient financial resources to repay some of their debts through a Chapter 13 repayment plan, rather than having all eligible debts discharged (wiped out) in Chapter 7. This presumption was established by Congress in 2005 through the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

Here's how it works:

• If a debtor's current monthly income exceeds the median income for a household of their size in their state, and they fail to pass a calculation known as the "means test," the court will legally assume they are attempting to misuse the Chapter 7 bankruptcy process.
• The "means test" is a formula designed to determine if a debtor has disposable income after accounting for certain allowed expenses. If the test indicates they have enough disposable income to make payments to creditors, the presumption of abuse is triggered.
• When this presumption is made, the debtor is generally not allowed to proceed with a Chapter 7 bankruptcy. Instead, the court expects them to file for Chapter 13, which involves a structured repayment plan over three to five years.
• However, the debtor can "rebut" this presumption. To do so, they must provide clear documentation demonstrating that "special circumstances" exist. These are unanticipated situations beyond the debtor's control that justify allowing them to deduct additional expenses or make adjustments to their income on the means test, ultimately showing they genuinely cannot afford a Chapter 13 plan.

Here are some examples to illustrate how presumed abuse applies:

• Example 1: Triggering Presumed Abuse

  Sarah, a marketing manager, earns a salary significantly above her state's median income for a single person. She has accumulated substantial credit card debt due to a period of lavish spending. When she files for Chapter 7 bankruptcy, her income, as calculated by the means test, clearly shows she has disposable income after accounting for standard living expenses. The court would likely invoke the presumed abuse rule, suggesting that Sarah has the financial capacity to repay a portion of her debts through a Chapter 13 plan rather than having them fully discharged in Chapter 7.

• Example 2: Rebutting Presumed Abuse with Special Circumstances (Unexpected Dependent)

  Mark and Lisa are a married couple whose combined income is above their state's median. They want to file for Chapter 7 bankruptcy due to overwhelming debt from a failed business venture. Initially, the court finds a presumption of abuse because their income appears sufficient. However, Mark and Lisa demonstrate that shortly before filing, they unexpectedly became the sole guardians of Lisa's two young nieces after a sudden family tragedy. This unforeseen increase in their household size and the associated, non-discretionary expenses for childcare, education, and medical needs for the nieces significantly reduce their actual disposable income, making a Chapter 13 plan impossible. This unexpected responsibility for new dependents would likely qualify as a "special circumstance," allowing them to rebut the presumption and proceed with Chapter 7.

• Example 3: Rebutting Presumed Abuse with Special Circumstances (Catastrophic Property Damage)

  David, a self-employed contractor, has an income that places him above the state median. He seeks Chapter 7 bankruptcy after his primary work vehicle and essential tools, which were underinsured, were completely destroyed in a flash flood. While his income *before* the flood was high, the immediate, out-of-pocket costs to replace his livelihood-sustaining equipment, coupled with a temporary loss of income while he rebuilt his business, created an extreme financial hardship not fully captured by the standard means test deductions. David can present documentation of the uninsured losses and the direct impact on his earning capacity as "special circumstances," arguing that his ability to pay a Chapter 13 plan has been severely and unexpectedly compromised, thereby rebutting the presumed abuse.