Abuse in the Bankruptcy Process

 

With the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the term “abuse” has become much more important in the bankruptcy process.

English: Part of Title 11 of the United States...

Title 11 of the United States Bankruptcy Code deals with “abuse” (Photo credit: Wikipedia)

Abuse is Shown in the Bankruptcy Process in One of Two Ways

  1. The presumption of abuse. When a debtor files a chapter 7 bankruptcy having claimed to pass the means test to be eligible to file under this chapter, a presumption of abuse arises. Section 707(b) of the Federal Bankruptcy Code governs the legal particulars on presumption, and the section was amended by the BAPCPA 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 the 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. You can rebut the presumption of abuse under 707(b) by documenting special circumstances that justify the fact you need to spend your income on additional unavoidable expenses. Most of the time, you can do this when you are unable to meet your monthly obligations.

  2. Abuse shown on general grounds. When a debtor acts in bad faith as determined under the totality of the circumstances, the acts are generally considered abuse. These types of abuse can lead to dismissal of Chapter 7 bankruptcy cases, with or without prejudice, but only a bankruptcy court judge has the authority to dismiss a case for abuse. Not to be confused with the
    criminal matter of bankruptcy fraud, committing an abuse is a civil matter dealt with by the bankruptcy court.

Following are some of the common instances of bad faith that might cause a dismissal:

  • a debtor files their petition in a bad faith;

  • a court trustee is of the opinion a debtor is abusing the bankruptcy process with improper legal action, fraudulent activity, or any delay that damages the bankruptcy process;

  • a debtor fails to provide all the required information concerning the case;

  • the overall debtor’s financial situation indicates abuse;

  • a debtor fails to take debt management training before receiving a discharge;

  • the debtor’s case is not in compliance with bankruptcy law; or

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

Dealing with Abuse in Bankruptcy is a Formal Process

The Adversarial Proceeding (AP) in the bankruptcy process is a formal hearing by a bankruptcy court that deals with alleged abuse. A bankruptcy trustee can file an AP when they suspect abuse or fraud, or if a condition arises from a debtor filing the bankruptcy that is considered presumptive abuse. Since the passing of the BAPCPA, most bankruptcy trustee’s file an AP based on presumptive abuse.

When a debtor has an AP filed against them, it usually takes legal expertise to combat the allegations made by the ones bringing the AP. That often requires the filing debtor to consult with a bankruptcy attorney.

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