Overcoming the Presumption of Abuse Under Section 707(b)(2)

Bankruptcy Attorney Tampa

In 2005, Congress adopted several amendments to the Bankruptcy Code. One of those amendments, the changes to Section 707(b) of the Code, was meant to make it easier for the bankruptcy trustee or the court to dismiss cases in which the debtor’s financial resources exceed a statutorily determined amount. In essence, if the individual consumer debtor’s income is such that he has enough disposable income to repay creditors some of what they are owed – defined as the debtor making a yearly income above the his state’s median income for a household of similar size and having enough disposable income after subtracting certain allowed expenses – then the Code creates a presumption that the debtor’s Chapter 7 filing abuses the purposes of the Bankruptcy Code. The debtor must then rebut the presumption to remain under Chapter 7 protection and avoid having his case dismissed.
If the debtor makes less than his state’s median income for a household of similar size, the presumption does not arise. In those cases, the individual consumer debtor’s case will only be dismissed if the party seeking dismissal can establish grounds based on the debtor’s bad faith or the totality of circumstances.
How Does A Debtor Rebut a Presumption of Abuse under 707(b)(2)?
So how does a debtor rebut a presumption of abuse? If presumption arises because the debtor’s disposable income exceeds the limits set by 707(b)(2), the debtor has an opportunity to rebut the presumption. To rebut the presumption a debtor must show special circumstances that justify an increase in expenses or an adjustment to current monthly income for which there is no reasonable alternative. Congress provided two examples of what constitutes special circumstances: serious medical condition or a call to active military duty. However, these examples were not meant to be exhaustive.
Courts have differed on how stringent a test to apply in deciding whether a debtor has shown sufficient special circumstances to rebut the presumption of abuse. Some courts reject special circumstances unless they are deemed to be as severe as the two examples provided by Congress and are beyond the debtor’s control. Others have adopted a more flexible approach and have been willing to overturn the presumption on a showing by the debtor of a reasonable basis for finding that the disposable income projected by the formula is unrealistic.
It is important to note that the Code places the burden on the debtor to provide full itemization, documentation, and an explanation of any claim of adjustment. The Code also requires the debtor to attest under oath to the accuracy of the information. If the adjustments the debtor proposes are allowed by the court, the adjustments must have the effect of reducing the debtor’s disposable income below the statutorily threshold level to find abuse in order for the presumption to be overcome.
Bottom line: Just because an individual consumer debtor does not pass the “means test” under Section 707(b)(2) of the Code does not mean that the debtor does not qualify for Chapter 7 protection. If the debtor can overcome the presumption of abuse by showing special circumstances with respect to their expenses or income, the debtor may still be able to qualify for Chapter 7 protection.