Chapter 7 bankruptcy can ease some of your financial burdens if you’ve fallen behind on monthly bills, but how do you know if you are eligible to file in the first place?
At a high level, to be eligible under chapter 7 you must be able to show that you do not have the means to pay your monthly expenses and debts given your current income.
Any individual with an income below their state’s median for their household size is automatically eligible to file under chapter 7. However, you may still be eligible even if your income falls above the median, you will just need to pass the chapter 7 means test first.
The means test calculates whether can feasibly repay your debts with your disposable income, which is the income you have left after paying for your monthly expenses. If the means test determines that even though your income is above your state’s median, you still cannot feasibly repay your unsecured debts while paying the remainder of your monthly expenses, you will be eligible to file. If, however, the means test determines you can feasibly repay your debts given your income less expenses, you will not be eligible to file under chapter 7.
To determine your eligibility, the means test starts with your total adjusted monthly income. Next, a variety of deductions are made from your income to determine your disposable income.
First, the test deducts national and local IRS standard expenses including food, clothing, out-of-pocket healthcare allowance, and housing. Because these deductions are standardized by the IRS, they won’t reflect the actual dollar amount you’ve spent on these expenses.
Next, your other necessary expenses are deducted. These include taxes, life insurance, childcare, and involuntary deductions from your income like retirement contributions. In addition, you can make deductions for health insurance, disability insurance, and health savings accounts, among other necessities. Finally, deductions are made for any debt payments made on property you own, like home mortgages or car loans.
These expenses are then totaled up and deducted from your adjusted monthly income to calculate your monthly disposable income. The calculation determines whether or not this leftover income is sufficient to repay the unsecured debts for which you seek relief under chapter 7.
The test sets upper and lower disposable income limits to determine eligibility, which are subject to change. Generally, if the test finds that your disposable income is below the established floor, you are eligible to file under chapter 7. If your disposable income is above the established ceiling, you are not eligible for chapter 7, unless you claim special circumstances which justify additional expenses or adjustments and may render you eligible.
If your disposable income falls between the floor and ceiling, there is one additional calculation to determine your eligibility. If the calculation finds that your disposable income is enough to pay for 25% of your unsecured debt, then you are not eligible under chapter 7, again unless you claim special circumstances.
Beyond income-based eligibility, to be eligible for chapter 7 you must also prove that you have sought credit counseling in the 180 days prior to filing, and you also must not have filed for bankruptcy in the prior 180 days.
Ultimately, determining your eligibility to file under chapter 7 can be a complex process, particularly if your income is above your state’s median. The means test is completed via a standardized form, and we can help guide you through its details to ensure the calculations represent the true extent of your income and deductions.
Sources:
https://www.uscourts.gov/file/19456/download
https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics
www.govinfo.gov/content/pkg/USCODE-2018-title11/pdf/USCODE-2018-title11.pdf