Do you know what the income limit is if you want to file Chapter 7 bankruptcy? Read on to find out from the bankruptcy lawyers at Husker Law in Omaha.
43% of married Americans consider themselves to be financially secure. That number drops to 29% for singles. Studies have shown that the higher your income level, the more debt you have too.
Sometimes that debt can get to be too much and can overwhelms you to the point you start considering bankruptcy. Sound familiar?
You might already know many people prefer Chapter 7 bankruptcy for its ability to provide a quick and clean slate. But you might be surprised to learn not everyone who wants to file is eligible for a Chapter 7 bankruptcy.
Chapter 7 bankruptcy carries income limits that prevent some individuals from being eligible.
If you hope to file for a Chapter 7 bankruptcy, it’s important to understand how income limits work and how you can calculate your own. Read on to learn more.
What is Chapter 7 Bankruptcy?
There are two main types of bankruptcy for individuals versus business, Chapter 13 and Chapter 7.
Chapter 13 bankruptcy expects the filer to submit a plan to repay debts over an extended period of time. Chapter 7 bankruptcy, on the other hand, allows debtors to sell off qualified assets to repay debts.
Chapter 7 bankruptcy tends to be quicker, allowing those filers to get to the clean slate faster. Yet, not all who want to file for Chapter 7 bankruptcy can qualify.
Chapter 7 Means Test
Chapter 7 laws were adjusted in 2005 to make sure that people weren’t abusing the bankruptcy system. The idea was that if a person had adequate income to work and pay off their debts they should.
To file for a Chapter 7 bankruptcy you must first qualify through a means test. The means test looks at your household income in comparison to the median household income in the state where you live. If you can’t pass this means test, you’re not eligible for a Chapter 7 filing.
Let’s take a closer look.
Comparing Household Income to Median Income
Eligibility considers your household income in comparison to the median household income of your state. It also considers the size of your household and compares a like-sized household.
The data for median incomes by states is calculated by the US Census Bureau and gets recalculated and reported multiple times every year.
Let’s take a closer look at how to calculate your monthly income.
Calculate Your Monthly Income
There is an established formula for calculating your monthly income. It’s based on looking at the previous 6 months of your household income, including the month you apply for bankruptcy.
If you file for bankruptcy in October, you would calculate your monthly income using the month of May through October.
Add
The first step is to look at your gross income. Remember, your gross income is the total of your income before any deductions or taxes are taken from your wages.
Wages are considered any source of money that you receive on a regular basis, including wages, alimony, child support, rental income, etc.
This would not include social security benefits or social security disability benefits.
Add up all the income sources for the 6-month window.
Divide
Because the means test looks at your income average, the next step is to divide your total income for the 6-month period. Divide your total income by 6.
Most people have income variables like commission or overtime that might make some months’ totals different from other months. The means test asks for your average monthly income.
Annual Income
Then the means test calculates your average annual income by taking your average monthly income and multiplying it by 12. This number is then compared to your state’s median income.
Remember, your household size is taken into consideration in this comparison too.
At this point, if your average income is less than the state’s median income, you’ve passed the means test. If it’s more, you may not be eligible for Chapter 7 bankruptcy. Although you can still qualify by also considering your monthly household expenses.
How Does Income Compare to Expenses?
Part 2 of the means test considers your monthly household expenses. While income looks at the previous 6-month period, expenses are forward-looking.
The means test calculates your household expenses per month to see if you have any income remaining after expenses.
Calculating your expenses and what is and is not included can get tricky. It’s wise at this point to have a Chapter 7 bankruptcy attorney guide you through these steps. Not all expenses are included in this calculation.
The means test helps indicate if you have any money left over at the end of the month after paying expenses. This will help decide whether you qualify for Chapter 7 bankruptcy.
Paycheck Deductions
The first step is to add up any deductions taken from your pay. This includes:
- Income taxes
- Social security
- Health insurance
- Disability insurance
- Term life insurance
- Health savings account expenses
If you have any deductions that you don’t control, like union dues or uniform costs, those are added up too.
Garnishments
It might surprise you to learn not all garnishments can be included as a monthly expense. Only domestic garnishments from ongoing child support or alimony obligations can be included.
If you have garnishments from unsecured debt like credit cards, those would have a stay through the bankruptcy, so going forward they would not get included.
Living Expenses
You can include your living expenses with some restrictions. These might include:
- Food
- Clothing and services
- Housekeeping supplies
- Personal care
- Healthcare expenses
Some parts of the country are more expensive than others. So, there are calculations based on national standards.
Necessary Expenses
Necessary expenses will include things you must pay for that have not already been included in the calculations. This might include term life insurance, education expenses, child care, care for a disabled family member, medical bills, and charitable contributions.
These are also subject to national standards.
Ongoing Debt Payments
You may have some debts that will continue once you move through bankruptcy. This might include a mortgage or car payment. These are also subject to national standards criteria.
Determining Eligibility for Chapter 7 Bankruptcy
Now you can determine if you’re eligible through the means test for Chapter 7 bankruptcy. You should subtract all of the listed and allowed monthly expenses from your average monthly income. If you end up with a negative number, you are eligible and would be allowed to proceed with the filing.
Again, there are many rules for what to include and what’s not eligible, it’s highly advisable to work with a bankruptcy attorney to make sure you’re including what you can.
Income Limit for Chapter 7 Bankruptcy
Making the decision to file for bankruptcy is not one to make lightly. It also isn’t a free pass to get out of paying your debts. The courts will look closely at the income limit through the means test to see if you qualify.
If you’re considering filing for bankruptcy or need questions answered to see if you’d qualify for a Chapter 7 filing, we can help. Contact us today at 402-415-2525 to schedule your initial consultation.
