Is There an Income Limit for Filing Chapter 7 Bankruptcy? The Straight Dope

The answer is a bit nuanced, but here’s the essence: there is no strict, hard-and-fast income limit for filing Chapter 7 bankruptcy. However, your income plays a crucial role in determining your eligibility through something called the Means Test. Let’s dive into the specifics of how income affects your ability to discharge your debts through Chapter 7.

Understanding the Means Test: Your Key to Chapter 7

The Means Test is the gatekeeper, acting as an analysis to see if you’re really in need of a Chapter 7. It’s essentially a financial snapshot, comparing your income to the median income for a household of your size in your state.

Step 1: The Current Monthly Income (CMI)

First, you’ll calculate your Current Monthly Income (CMI). This isn’t just your salary today; it’s the average gross income you received over the six full calendar months before you file for bankruptcy. This includes wages, salaries, tips, bonuses, commissions, rental income, unemployment compensation, Social Security benefits (though some benefits are exempt), and even contributions to your household from other people.

Step 2: Comparing CMI to State Median Income

Next, this CMI is compared to the median income for a household of your size in your state. This data is updated periodically, so you’ll need the most current figures from the Department of Justice.

• If your CMI is below the state median income: You’ve cleared the first hurdle! This creates a presumption that you are eligible for Chapter 7. You can still be denied, but the initial presumption is in your favor.
• If your CMI is above the state median income: Don’t despair just yet. You’ll move on to the next part of the Means Test, where allowable deductions can reduce your income for the purpose of the test.

Step 3: Deductions and the Means Test Form B22A

This is where things get detailed. If your CMI is above the median, you’ll complete Form B22A to determine if you have sufficient disposable income to repay your debts. You’ll be able to deduct certain expenses, including:

• Living Expenses: Housing, utilities, food, clothing, and other necessary expenses. The IRS sets standards for some of these deductions.
• Debt Payments: Payments on secured debts like mortgages and car loans.
• Childcare Expenses: Costs associated with caring for dependents.
• Healthcare Expenses: Medical costs, including insurance premiums.
• Taxes: Federal, state, and local taxes.
• Mandatory Payroll Deductions: Contributions to retirement accounts or union dues.

These deductions are then subtracted from your CMI. If, after these deductions, the remaining amount (your “disposable income”) is low enough, you can still qualify for Chapter 7. Generally, if you have enough disposable income to repay a significant portion of your debts over five years, you will not qualify for Chapter 7.

Step 4: Presumption of Abuse

The ultimate result of the Means Test can lead to a “presumption of abuse.” This means the court believes you have the ability to repay your debts and Chapter 7 would be an abuse of the bankruptcy system. If a presumption of abuse arises, you have a few options:

• Challenge the presumption: You can argue that special circumstances exist that justify your filing, even with a higher income. This requires demonstrating hardship or unusual expenses that aren’t adequately captured by the standard Means Test calculations.
• Convert to Chapter 13: Chapter 13 bankruptcy involves a repayment plan, typically lasting three to five years.
• Dismiss the case: You can withdraw your bankruptcy petition.

Why This Matters: Protecting Yourself and Your Future

The Means Test is designed to prevent people who can afford to repay their debts from using Chapter 7 to avoid their financial obligations. It’s a crucial part of the bankruptcy system and is there for a good reason. By understanding how it works, you can:

• Accurately assess your eligibility: Before incurring legal fees and filing a petition, you can get a realistic idea of whether you’ll qualify for Chapter 7.
• Maximize your deductions: Knowing what expenses are deductible allows you to present the strongest possible case.
• Make informed decisions: If you don’t qualify for Chapter 7, you can explore other options like debt management, debt consolidation, or Chapter 13 bankruptcy.

Chapter 7 FAQ: Need-to-Know Information

Here are some frequently asked questions to give you a more complete picture of how income affects Chapter 7 eligibility.

FAQ 1: What if my income has changed recently?

The Means Test looks at your income over the previous six full calendar months. If your income has significantly decreased since then, you can present evidence of this change to the court to support your case. You need to thoroughly document this change, as the Trustee will require proof of the loss of income.

FAQ 2: What happens if I fail the Means Test?

Failing the Means Test doesn’t automatically disqualify you from all forms of bankruptcy. You can consider filing for Chapter 13, which involves a repayment plan tailored to your income and expenses.

FAQ 3: Can I include income from my spouse in the Means Test?

Generally, if you are married and living together, your spouse’s income is included in the Means Test, even if they aren’t filing for bankruptcy. The exception to this is if you are legally separated.

FAQ 4: What if I’m self-employed? How does the Means Test apply?

The Means Test applies to self-employed individuals as well. You’ll need to calculate your net income (gross income minus business expenses) over the six-month period. You can deduct reasonable and necessary business expenses. Keeping meticulous records of all business income and expenses is particularly important.

FAQ 5: Are there any exceptions to the Means Test?

Yes. Certain veterans and active-duty military personnel are exempt from the Means Test under specific circumstances. This typically involves debts incurred during active duty or while performing homeland defense activity.

FAQ 6: What if I live in a high cost-of-living area? Does that affect the Means Test?

While there is no specific adjustment for living in a high-cost area, the Means Test does allow deductions for actual expenses, including housing and utilities. If your expenses are legitimately higher than the IRS standards, you can deduct the actual amounts paid.

FAQ 7: What about Social Security income? Is that counted?

Generally, Social Security retirement income is included when calculating your current monthly income. However, certain Social Security benefits, such as Supplemental Security Income (SSI), are typically exempt and don’t affect your eligibility.

FAQ 8: How often does the median income data get updated?

The median income figures are updated periodically by the U.S. Trustee Program, typically a couple of times per year. It’s crucial to use the most current data available at the time you file your bankruptcy petition.

FAQ 9: What if I’m unemployed? Can I still file Chapter 7?

Unemployment doesn’t automatically disqualify you. The Means Test looks at your income over the previous six months. If your income was below the median during that time, you may qualify. However, if you have no income and no assets, the court may question whether you even need bankruptcy, as there may be nothing for creditors to collect.

FAQ 10: How can I find out the median income for my state and household size?

You can find the latest median income figures on the website of the United States Trustee Program or by consulting with a qualified bankruptcy attorney.

FAQ 11: Is it possible to challenge the presumption of abuse if I fail the Means Test?

Yes. You can argue that special circumstances, such as a serious illness, job loss, or unexpected expenses, make it unfair to assume you can repay your debts. This requires presenting compelling evidence to the court.

FAQ 12: Do I need a lawyer to file Chapter 7?

While you can file bankruptcy without an attorney, it’s strongly recommended that you seek legal counsel. The Means Test and bankruptcy laws are complex, and an experienced attorney can help you navigate the process, ensure you qualify, maximize your deductions, and protect your assets.

In conclusion, while there isn’t a definitive income cutoff for Chapter 7, the Means Test is the pivotal factor. Understanding how it works is crucial for determining your eligibility and making informed decisions about your financial future. So get to know it!