What Is the Income Limit for Filing Chapter 7?
The short answer is, it depends upon where you live, the size of your household, and your qualifying expenses.
In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) which, among other things, imposed an income limit on Chapter 7 debtors in order to prevent abuse of the bankruptcy process by those who earned enough income to pay their debt.
This article describes those limits and how your income is calculated under the Chapter 7 means test.
If you are considering filing bankruptcy and have concerns that you may make too much money to file, call the Chapter 7 bankruptcy lawyers at the Law Offices of David M. Offen. We help you assess your income and expenses. In many cases, when it appears that someone earns too much to file Chapter 7, a thorough assessment shows otherwise.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a four- to six- month legal process during which a debtor discloses all income, assets, expenses, and debts to the Court and the Chapter 7 Trustee and is discharged of all unpaid unsecured debt such as credit cards and medical bills. A Chapter 7 debtor may also surrender unaffordable collateral such as real property or a motor vehicle and have the underlying debt discharged.
The Bankruptcy Means Test
In order to qualify to file Chapter 7 bankruptcy, the debtor must pass what is called the “means test,” which calculates the debtor’s income taking into consideration the size of the debtor’s household and certain qualifying expenses.
Income Limit for Filing Chapter 7
The means test starts with a comparison of the debtor’s income with the state median income of the debtor’s household size. The Census Bureau calculates the state median income and updates it frequently.
If the debtor’s income is less than the current state median income, the debtor passes the means test and may file Chapter 7 bankruptcy. If the debtor’s income is greater than the state median income, the debtor may still file Chapter 7 if certain qualifying expenses leave the debtor with no disposable income.
Determining Household Income
What Counts as Income for the Chapter 7 Means Test?
You calculate your household income for the purposes of the Chapter 7 means test by adding up or having your lawyer add up all income earned in the six months prior to the month you intend to file bankruptcy, from the following sources:
- Salary
- Wages
- Tips
- Overtime Pay
- Bonuses
- Payments Received as an Independent Contractor
- Alimony or Spousal Support
- Child Support
- Rental Income
- Trust or Annuity Payments
- Any other money you receive on a regular basis
Social security benefits (SSI or SSDI) do not count as income for the purposes of the Chapter 7 means test, so if social security is your only source of income, you qualify to file Chapter 7.
Calculating Your Monthly Income for the Chapter 7 Means Test
Once you and your lawyer has added up all you’ve earned for the six months prior to the month you intend to file, divide that result by six. For workers who receive the same amount each paycheck, this may seem like a redundant exercise. However, most people’s income fluctuates from month to month and the means test needs an average.
Once you’ve calculated your average monthly income, multiply it by twelve to get your annual income for the purposes of the means test. Compare that figure to the median income for your household size in your state. If your income is lower than the state median income, you’ve passed the means test.
If your income is higher than the state median income for a household of your size, you still may pass the means test if after deducting qualifying expenses you have no disposable income.
Qualifying Expenses
Only certain expenses can reduce your income under the means test. The bankruptcy court has established the standard expenses and actual expenses can be deducted from income.
Standard Expenses
There are limits according to household size for the following expenses:
- Mortgage or rent
- Transportation (car operation/maintenance or public transportation)
- Utilities and housing maintenance
- Housekeeping supplies
- Healthcare expenses
- Groceries
- Eating out
- Clothing
- Dry cleaning and laundering
- Personal grooming
Actual Expenses
You must have documentation showing that you actually pay the following expenses in order to deduct them from your income in the means test:
- Term life insurance
- Education that is a condition of your employment
- Child care expenses
- Expenses incurred for the health or welfare of a special needs child
- Medical bills exceeding the national standards for healthcare expenses
- Domestic support payments
- Paycheck deductions for income taxes, social security, health insurance, disability insurance, term life insurance, and health savings account
- Charitable contributions not exceeding 15% of gross income
Disposable Income
If after deducting all standard and actual expenses you earn less than the state median income for a family of your size, you pass the means test.
If you earn more than the state median income, you may still file Chapter 7 if more than 50% of your debt is business or nonconsumer debt. Disabled military veterans, reservists called to active duty, and members of the National Guard may also still file for Chapter 7 if their income exceeds the state median..
If you do not fit in those categories, then you have disposable income and may not be able to file Chapter 7. In this case, you would file Chapter 13, pay a portion of your debt through your Chapter 13 plan over three or five years, and be discharged of the unpaid remainder.
Talk with an Experienced Bankruptcy Lawyer
The means test is complex, and there are many qualifying expenses that you may not realize you can deduct from your income to pass the means test and qualify to file Chapter 7. We can help you. Call us today for your free, no-obligation consultation.
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