Debtors should be aware that there are several alternatives to Chapter 7 relief. For example, debtors who are engaged in business, including corporations, decease partnerships, and sole proprietorships, may prefer to remain in business and avoid liquidation. Such debtors should consider filing a petition under Chapter 11 of the Bankruptcy Code. Under Chapter 11, the debtor may seek an adjustment of debts, either by reducing the debt or by extending the time for repayment or may seek a more comprehensive reorganization.
Sole proprietorships may also be eligible for relief under Chapter 13 of the Bankruptcy Code. In addition, individual debtors who have regular income may seek an adjustment of debts under Chapter 13 of the Bankruptcy Code. A particular advantage of Chapter 13 is that it provides individual debtors with an opportunity to save their homes from foreclosure by allowing them to “catch up” past due payments through a payment plan. Moreover, the court may dismiss a Chapter 7 case filed by an individual whose debts are primarily consumer rather than business debts if the court finds that the granting of relief would be an abuse of Chapter 7. 11 U.S.C. § 707(b).
If the debtor’s “current monthly income” is more than the state median, the Bankruptcy Code requires an application of a “means test” to determine whether the Chapter 7 filing is presumed abusive. “Current monthly income” received by the debtor is a defined term in the Bankruptcy Code and means the average monthly income received over the six calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from non-debtors and including income from the debtor’s spouse if the petition is a joint petition, but not including social security income or certain payments made because the debtor is the victim of certain crimes.
“Abuse” To determine whether a presumption of abuse arises, an individual debtor with primarily consumer debts who files a Chapter 7 case must complete the “means test,” as outlined in Official Bankruptcy Form B22A, to determine whether the debtor is eligible for chapter7. Abuse is presumed if the debtor’s aggregate current monthly income over the next 5 years, minus certain statutorily allowed expenses, is more than (i) $10,000, or (ii) 25% of the debtor’s non-priority unsecured debt, as long as that amount is at least $6,000. (2) The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income.
Unless the debtor overcomes the presumption of abuse, the case will generally be converted to Chapter 13 (with the debtor’s consent) or will be dismissed. Debtors should also be aware that out-of-court agreements with creditors or debt counseling services may provide an alternative to a bankruptcy filing.
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