Chapter 7 bankruptcy and presumed "abuse"

For Mississippians drowning in debt, there are many benefits to Chapter 7 bankruptcy. Chapter 7 is one of the two common types of bankruptcy for individuals; the other is Chapter 13. The main difference between the two - though certainly not the only one - is that Chapter 7 involves liquidation of assets to satisfy creditors, while Chapter 13 involves a repayment plan.

Many of those who declare bankruptcy choose their type of bankruptcy after a thorough discussion with a personal bankruptcy attorney. For those who decide that filing for Chapter 7 is best for them, it's important to know that not every debtor qualifies for Chapter 7. Since Chapter 7, also known as strait bankruptcy, involves liquidation of assets as well as the discharge of debts, it is an extremely helpful option for those who truly need a fresh financial start.

However, as with every resource, there are those who might abuse the benefits of Chapter 7. In order to prevent an abuse of Chapter 7, section 707(b)(2) of the Bankruptcy Code describes a means test to classify a debtor's filing for Chapter 7 as presumed abuse. If a debtor's aggregate current monthly income is more than $10,950 minus certain allowable expenses over five years, the filing may be presumed to be an abuse of the Bankruptcy Code. The same is true if that income is over 25 percent of the debtor's unsecured nonpriority debt, although the amount must be at least $6,575.

If a debtor's filing is presumed to be abuse, the case is likely to be converted to Chapter 13. Moreover, it is possible for debtors to offer a rebuttal to the presumption of abuse by demonstrating unique circumstances which justify certain expenses or adjustments to monthly income. As one can see, dealing with presumptions of abuse of the Bankruptcy Code can become very confusing. A local bankruptcy attorney can explain in detail how Chapter 7 works, who qualifies and how to avoid presumptions of abuse.

Source: uscourts.gov, "Bankruptcy Basics Glossary," accessed Sept. 21, 2015

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