Chapter 7 of the U.S. Bankruptcy Code provides a liquidation process for consumer debtors. It accomplishes the twin objectives of bankruptcy, providing a fresh start to the “honest but unfortunate debtor” and ensuring an equitable and ratable distribution of assets to creditors. A chapter 7 debtor enters bankruptcy with an unmanageable debt load and insufficient assets to satisfy debt. To maximize the value of the debtor’s estate, a trustee liquidates nonexempt assets (if any), reviews and objects to claims filed by creditors, and makes distributions to creditors. At the end of the process, the debtor emerges with a discharge of pre-bankruptcy, or prepetition, debts and ownership of assets free and clear from the claims of prepetition creditors

BAPCPA

In response to the perception that consumer debtors were abusing the bankruptcy system, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The perceived abuse was that Chapter 7 debtors had available income to repay a reasonable portion of their debts under a chapter 13 plan. To achieve this objective, , Congress created the “means test” with the intent of channeling debtors away from chapter 7 and into chapter 13.

Prior to BAPCPA, there was a presumption in favor of the debtor’s right to file a chapter 7 case and deferred to the bankruptcy court’s discretion whether the debtor should remain in chapter 7. Under BAPCPA, the opposite is true. Now, there is a presumption of abuse if certain repayment thresholds are met. A chapter 7 debtor now has the burden of rebutting the presumption of abuse by showing that he or she has insufficient disposable income to repay his or her creditors in a chapter 13.

Figuring the means test

The code has a complicated formula to determine whether the debtor’s monthly disposable income raises a presumption of abuse. A debtor is ineligible for chapter 7 relief if he or she has monthly disposable income that, over the five-year span of a hypothetical chapter 13 plan, would equal or exceed the lesser of (i) 25 percent of the debtor’s nonpriority unsecured claims, or $7,475, whichever is greater, or (ii) $12,475. In simpler terms, if a debtor’s disposable monthly income exceeds $207.91 (i.e., the ceiling of $12,475 divided by the hypothetical 60 monthly chapter 13 plan payments), then the debtor’s chapter 7 case must be dismissed or converted, unless the debtor can rebut by showing special circumstances. If a debtor’s disposable monthly income is less than $124.59 (i.e., the floor of $7,475 divided by the hypothetical 60 monthly chapter 13 plan payments), then the debtor’s case is not subject to the presumption of abuse. If a debtor’s disposable monthly income falls anywhere in the range between these two amounts, then the outcome will be determined by the amount of the debtor’s general unsecured debts. For example, if a debtor has $150 of disposable monthly income, the total amount available for repayment is $9,000 (i.e., $150 × 60 months). This amount is then compared to 25 percent of the debtor’s nonpriority unsecured claims. In this hypothetical, if the debtor’s nonpriority unsecured claims are less than $36,000 (i.e., 25 percent of $36,000 equals $9,000), the debtor’s case is subject to the presumption of abuse. Conversely, the case is not subject to the presumption of abuse if the nonpriority unsecured claims are greater than $36,000.

If you are experiencing debt, contact the law firm of Melanie Tavare. Her experience and knowledge can get you on the track to financial security.