Your Chapter 7 bankruptcy case can be dismissed and you prosecuted for misusing the benefits provided therein.

Dismissal of Chapter 7 bankruptcy due to abuse
Stacy B Miller's picture

Your finances are dilapidated!

Bankruptcy Dismissal due to Abuse

Debts have taken a mighty toll on your life and finally you have filed for Chapter 7 bankruptcy with a hope to get your debts discharged. Yet there is a little tension that is lingering at the back of your mind. What if your petition gets dismissed?

It is indeed disappointing to find your last resort crumbling with a dismissal of your bankruptcy appeal. More disappointing it is, if the case gets dismissed on the grounds that granting relief to the petitioner would be an abuse of Chapter 7 bankruptcy.

Now the next thing that crops up is “what is considered abuse in a bankruptcy case”.
Abuse can be broadly pointed out in either of the ways:

1. Through an un-rebutted presumption of abuse, arising under new Chapter 7 Means Test, or

2. On general grounds, such as bad faith, determined under the totality of the circumstances.

Abuse under Means Test

Section 707(b) of the Federal Bankruptcy Code, dealing with the Means Test, was amended to provide for dismissal of Chapter 7 cases upon a finding of abuse by an individual debtor. In such cases, abuse is presumed if your current monthly income over last 5 years has been more than $10,950, or 25% of your non-priority unsecured debt (as long as that amount is at least $6,575). However, you can rebut the presumption by documenting special circumstances that justify the fact that you need to spend your income on additional unavoidable expenses as well and thus you are unable to meet your monthly obligations.

Abuse out of bad faith

Apart from the Means Test, abuse can also arise out of bad faith and lead to dismissal of Chapter 7 bankruptcy cases. Following are some of the common instances of bad faith that causes dismissal:

•The debtor files the petition in a bad faith

•Totality of debtor’s financial situation indicates abuse.

•The debtor fails to provide the required information for prosecution of the case.

•The debtor does not take debt management training before receiving a discharge.

•The case is not in compliance with the law.

•The court/Trustee is of the opinion that the debtor is abusing the bankruptcy process with improper prosecution, fraud or even prejudicial delay.

•The debtor has a majority of consumer debts and not business debts.

Asserting abuse

Subsection 6 of Section 707(b) allows only the judge or the Trustee to move for dismissal on the grounds of abuse. While the U.S. trustee, bankruptcy administrator or judge can assert these bases in order to find out abuse in any case, creditors and trustees are empowered to assert it only in cases where the debtor's income is above the defined state median.

What if you can’t rebut the abuse presumption?

If you are not in a position to rebut the presumption of abuse put forward by the court, then you have two choices in hand. You can either convert your Chapter 7 case to a Chapter 13 bankruptcy case, or you can simply let your case get dismissed by the court. Chapter 13 will get your debts restructured and help you pay off your debts within a span of 3-5 years on basis of your income and allowable expenses. In fact, getting your case converted will be the best way out in case you are unable to rebut the presumption.

However, it is always advisable that you immediately consult a bankruptcy attorney in your state, if you are confronted with any possibility of abuse or any chances of getting your Chapter 7 case dismissed.

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