Statement of Presumed Abuse

     Statement of Presumed Abuse.

     Sounds pretty bad, doesn't it?  This is notice that some Chapter 7 Bankruptcy Debtors will receive in the mail.  It means that the United States Trustee's Office, which is the office that is charged with maintaining the integrity of the bankruptcy code, thinks that you really should have filed a Chapter 13 bankruptcy.

     Before your blood pressure reads off the charts or your eye starts twitching uncontrollably...Relax.  This notice is often scarier than it looks.  Many times receiving this notice in the mail does not mean that your Chapter 7 bankruptcy will need to be converted to a Chapter 13....but lets back up and discuss how and when you are likely to receive a Statement of Presumed Abuse in your Chapter 7 bankruptcy.

    Each Chapter 7 bankruptcy petition contains a form called a Means Test.  The means test takes all of your household's income (not including social security) over the 6 months prior to filing, adds it all up, and divides it by 6 to come to your average over the last 6 months.  This amount is called the debtor's current monthly income (CMI).  Your CMI is compared to the average yearly income of your household size in Indiana.  For example, a married debtor with 2 children would be compared to the income of an average family of 4 in Indiana.  In the event your yearly income is higher than the average family of your size, there is a presumption that you should have enough money left over at the end of the month to pay into a Chapter 13 repayment plan.

     However, simply because a debtor's income is higher than the average household of his or her size in Indiana, all hope is not lost.  The means test works similarly to an income tax return in that you take deductions for living expenses, debt repayment, taxes withheld, etc.  However, most of the deductions are not the debtor's current living expenses, they are average living expenses for a household size that is the same as the debtor.  Once the debtor reaches the end of the means test, if the number that the means test has determined the debtor SHOULD have left at the end of the month is higher than $167.67, the presumption of abuse has arisen.

      Just because the presumption of abuse has arisen does not mean that a person could not file a Chapter 7 bankruptcy and receive a discharge.  For example, if a debtor had a very well-paying job and was laid off 3 months prior to the filing of the bankruptcy, the 3 months that the debtor was working could lead to the calculation showing a presumption of abuse.  However, in reality, the Court and the trustee's office understand that since the debtor no longer has that job, that even though the means test says the debtor should have money left at the end of the month that the debtor's job loss is a change in circumstances that rebuts the presumption of abuse.  In addition, debtors may set forth "special circumstances" in the means test.  Special circumstances are exactly as they sound....justifiable additional expenses which make it impossible for a debtor to make a payment into a Chapter 13 repayment plan.  Special circumstances may be a student loan payment or the expense of separate households of spouses necessary for employment.  What exactly will qualify as a special circumstance varies from jurisdiction to jurisdiction and is often the subject of argument in bankruptcy courts today.

      If a debtor is going to receive a Statement of Presumed Abuse, it will be filed within ten (10) days of that debtor's 341 meeting of creditors.  Sometimes an attorney from the United States Trustee's ("UST") office will even show up the the 341 meeting of creditors to question the debtor, but not always.  The Statement of Presumed Abuse does not state exactly what the UST finds to be problematic about your bankruptcy petition.  Typically, after your attorney receives the notice, he or she will discuss your case with a trial attorney from the UST's office to determine what exactly the UST perceives to be problematic with your case being successfully discharged as a Chapter 7.

       Sometimes the UST will find what they perceive to be an error in the way that the Debtor's Means Test was completed.  Sometimes, the UST's office will have calculated the debtor's income differently than the attorney's office, or sometimes the UST's office will simply have questions about the debtor(s) and their ability to make payments into a Chapter 13.  Often, the UST's office will want proof of high expenses, such as medical expenses, day care expenses, etc.  In the event that this series of conversations satisfies the UST's inquiry, the UST may withdraw its Notice of Presumed Abuse, and the Chapter 7 debtor will likely move on to receive a discharge.

       In the event that the UST is not satisfied, and continues to believe that the debtor should have funds to pay into a Chapter 13, the UST has 30 days from the filing of the Notice of Presumed Abuse to file a Motion to Dismiss or Convert your Chapter 7 bankruptcy petition.  My experience has been that most cases can be resolved so that the Debtor continues to receive a Chapter 7 Discharge rather than the UST filing a Motion to Dismiss.  I will save the explanation of the Motion to Dismiss process, in the event it is filed, for my next discussion.

       In the meantime, feel free to e-mail me or comment on a subject that you would like me to discuss on my blog.  As always, if you are a person struggling with debt in central Indiana, I would be happy to meet with you to discuss whether or not bankruptcy or debt negotiation could help with your situation.  You can find me at Halcomb Singler, LLP, in Carmel, Indiana.  Call me for a free initial consultation on bankruptcy.

Halcomb Singler, LLP, is a debt relief agency.  It helps people file for bankruptcy under the bankruptcy code.  No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so.  The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses.