When you file for Chapter 7 bankruptcy, the goal is a discharge of your debts. An the worst-case scenario is not only getting your case dismissed, but having it dismissed for abuse.
The bankruptcy court can dismiss your case if it finds that the granting of relief would be an abuse of Chapter 7. This is true only if the majority of your debts are considered, “consumer debts,” rather than, “business debts.”
The issue will usually come into play in your bankruptcy case if you are required to complete the means test because your current median income exceeds the state median for a household of your size. In such case, abuse is presumed if your current monthly income over 5 years is more than (i) $10,950, or (ii) 25% of the your non-priority unsecured debt, as long as that amount is at least $6,575.
Once the presumption is found by the bankruptcy judge, you can rebut it by showing special circumstances that justify additional expenses.
For example, let’s say your means test shows that you have $500 left over each month to repay your debts. Under normal circumstances, this would be a problem in Chapter 7 bankruptcy. But if you just found out that you or your spouse is pregnant and there will be a baby in the house in a few months, that could qualify as special circumstances.
Or take the same scenario but let’s say you’ve just lost your well-paying job and had to take a huge pay cut. Again, special circumstances may exist to rebut the presumption of abuse.
What if you can’t rebut the presumption of abuse? Well, you’ve got two choices – convert the case to one under Chapter 13 or let it get dismissed. In such a case, Chapter 13 bankruptcy (which involves repayment of part or all of your debts over a 3-5 year period based on your income and permitted expenses) may be the way to solve the problem.
But as always, it’s important to talk with a lawyer if you’re faced with a possible finding of abuse or motion to dismiss your Chapter 7 case.