Chapter 7 bankruptcy is limited to debtors who do not have the means to make payments to unsecured creditors. Whether or not a debtor can pay creditors is determined using a means test. A means test takes the average income over the last six months, not counting funds paid by the Social Security Administration, and then deducts standard IRS deductions. The resulting number is the debtor’s monthly disposable income. If the debtor has too much disposable income then a presumption of abuse exists.
A presumption of abuse implies that the debtor should not be eligible for a discharge under Chapter 7 because they have the means to make payments to unsecured creditors. However, a presumption can be rebutted. Rebutting the presumption of abuse means that the debtor proves that although the means test shows he has disposable income, he does not have the ability to make payments to unsecured creditors.
The most common way to rebut the presumption of abuse is to show that current income is lower than the average for the last six months. For example, consider a debtor who used to have a job earning $100,000 a year but was laid off 3 months ago. The debtor would have earned $8,333.32 each month, four, five, and six months ago. However, the debtor hasn’t earned any income during the last three months. Based upon the average income for the last six months, the debtor earned an average of $4,166.66 per month, which in most Texas counties, would make the debtor ineligible for a discharge under Chapter 7 if he does not have a wife and/or kids. In this example, the debtor could claim the presumption of abuse is rebutted because even though the debtor failed the means test he doesn’t have the ability to pay his unsecured creditors.
The presumption of abuse is limited to above-median debtors, meaning debtors whose income is above the median income for their household size in the region in which they live. Disabled veterans and debtors whose debt is primarily business debt are also sometimes excused from qualifying under the means test.