How Much Can I Make And Still File Chapter 7?
The bankruptcy means test determines whether your income is low enough for you to file for Chapter 7 bankruptcy. It’s a formula designed to keep high wage earners from filing for Chapter 7 bankruptcy. High-income filers who fail the means test can use Chapter 13 bankruptcy to repay a portion of their debts, but won’t be able to use Chapter 7 bankruptcy to wipe out their debts altogether. However, having to take the Chapter 7 means test doesn’t mean that you must be penniless to use Chapter 7 bankruptcy. You can earn significant monthly income and still qualify for Chapter 7 bankruptcy if you have a lot of expenses, such as a high mortgage and car loan payments, taxes, and other expenses.
How Does the Chapter 7 Means Test Work?
The means test was designed to limit the use of Chapter 7 bankruptcy to those who can’t pay their debts. It does this by deducting specific monthly expenses from your current monthly income (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly disposable income. The higher your disposable income, the more likely you won’t be allowed to use Chapter 7 bankruptcy. Instead, you’re expected to use your disposable income to repay creditors. Only bankruptcy filers with primarily consumer debts not business debts need to take the means test. The first step of the means test is to determine whether your income is more or less than the median income in your state. If you earn more than the median, you must figure out whether you would have enough left over, after subtracting certain expenses, to repay some of your debt.
Is Your Income More Than the Median?
The first step is simple: If your current monthly income is less than the median income for a household of your size in your state, you pass. You’re done. You do not need to complete the rest of the means test. You can file for Chapter 7. For those whose household income exceeds the state median, the means test computations become more complicated. You must determine whether you have enough income left over called disposable income, after paying your allowed monthly expenses, to pay off at least a portion of your unsecured debts such as credit card bills. If your disposable income adds up to more than a certain amount, you fail the means test and cannot get a discharge by filing for Chapter 7 bankruptcy. Median income levels vary by state and household size. Also, each county and metropolitan region has different allowed amounts for categories of expenses, such as necessities, housing, and transportation.
If you file a Chapter 7 bankruptcy, and your debt is primarily consumer debt, you have to pass the means test to receive a discharge (get your qualifying debts wiped out). However, if your bankruptcy is a business bankruptcy, you get to skip this step. You don’t have to take the means test. A business bankruptcy is one in which the majority of the filer’s debt is business debt. It’s evident that if a business entity such as a partnership, limited liability Company, or corporation files for bankruptcy, categorizing the bankruptcy will be straightforward. The filing will be a business bankruptcy. But it isn’t always that simple. An individual who files a personal case yet operates a business can and probably will have business debt and another type, too consumer debt. If the filer’s debt is primarily consumer in nature, the bankruptcy will be a consumer bankruptcy even if the filer has some business debt, as well. Whichever type the filer has more of will determine the classification. Business debt and a profit motive go hand-in-hand. Simply put, you incur business debt while trying to make money. For instance, if you borrow money to buy a food truck, the loan would be of a business nature. The same would hold true if you purchased tools for your construction business. By contrast, goods and services of a personal nature that you purchased on credit are consumer in nature. For instance, housing expenses, clothing, and school supplies for your children, and costs for a gardener, housekeeper, or pool services are all examples of consumer debt.
If You Pass the Chapter 7 Means Test
You should be aware that merely passing the means test doesn’t automatically qualify you to file for Chapter 7 bankruptcy. Another step exists. The court will look at two additional forms:
• Schedule I: Your Income and,
• Schedule J: Your Expenses.
If, after deducting your actual monthly expenses from your current monthly income, you have enough remaining to pay something to your creditors, the court might convert (switch) your Chapter 7 case to a Chapter 13 bankruptcy. Also, just because you qualify under the means test doesn’t necessarily mean you should file for Chapter 7 bankruptcy only that you can.
If You Don’t Pass the Chapter 7 Means Test
If you don’t pass the means test, you’re limited to using Chapter 13 bankruptcy, which requires you to make monthly payments over a three to five year period according to a strict budget monitored by the court. Most people who file for bankruptcy prefer Chapter 7, which requires no repayment. However, Chapter 13 bankruptcy is still the best way to handle specific types of problems, like curing a default on a mortgage and repaying debts that won’t go away in bankruptcy, such as most taxes and support arrearages. But before you settle on Chapter 13 bankruptcy, be sure to talk to a lawyer. With expert legal advice, you might find that you’re able to pass the means test after all.
Expenses That Can Help You Pass Bankruptcy’s Means Test
Even if you make too much money to automatically pass the Chapter 7 means test, you may still be able to qualify for Chapter 7 bankruptcy. This is because you can deduct certain expenses in full to help you reduce your disposable income on the means test.
Your Income and the Means Test
When determining whether you qualify for Chapter 7 bankruptcy, the means test compares your average gross monthly income for the six-month period before filing to the median income of similar households in your state. You’ll automatically pass if your income is below the state median (you’ll use your gross income for this calculation). The means test presumes that low-income debtors can’t pay back creditors and therefore, aren’t abusing the system by filing for Chapter 7 bankruptcy. However, if your income is above the median, you don’t automatically fail, either. You’ll complete the rest of the means test and subtract allowed expenses from your gross income. If the amount that remains isn’t enough to make a meaningful payment to your creditors, you’ll still qualify for a Chapter 7 discharge.
Are You Required to Take the Means Test?
If you’re filing a consumer bankruptcy and you likely are then yes, you’ll need to take the means test. See the exclusion criteria on Statement of Exemption from Presumption of Abuse Under 707(b)(2) if you’re a disabled military veteran or reservist. But, on occasion, an individual who doesn’t own a business (or a sole proprietor) will still qualify to file a Chapter 7 business bankruptcy, escape the means test, and be able to discharge qualifying debt even though the filer wouldn’t pass the means test. Determining whether yours is a consumer or business bankruptcy starts with figuring out whether your debts are primarily consumer or business debt. Consumer debt is incurred for personal, family, or household purposes and includes:
• residential rent or a mortgage balance
• household utilities and cable bills
• food (such as groceries and restaurant meals)
• clothing for yourself and your family
• a movie, play, or other entertainment, and
• a personal or family vacation.
By contrast, business debt arises from a profit motive. For instance, suppose that you want to give homemade vases as holiday gifts, so you take out a loan to purchase pottery-making supplies. The loan would be a consumer debt. However, if the vases turn out exceptionally well and you decide to sell them at a local music venue instead, the loan would be a business debt. Here’s where the loophole comes in. Personal tax debt and student loan obligations are usually considered business debt (check the laws in your state). People with large balances might qualify as an individual filing for a business bankruptcy and avoid taking the means test. Because this sort of filing can get tricky, it’s a good idea to consult with a local bankruptcy lawyer who knows how your court will handle particular types of debt.
Using Your Expenses to Pass the Means Test
If you have enough disposable monthly income to pay back unsecured creditors, you won’t qualify for Chapter 7 bankruptcy. As a result, if your income is high, your expenses must also be high to pass the means test. The means test requires debtors to use national and local standards for most living expenses, rather than the actual amount of the debtor’s expenses. Otherwise, debtors could just claim they don’t have the money to pay back creditors because they wear name brand clothing or eat at expensive restaurants. But you are still allowed to claim your actual expenses for certain things. These deductions include obligations you’re required to pay as well as expenses necessary for your health and welfare. As a result, these expenses may sufficiently reduce your disposable income to qualify you for Chapter 7 bankruptcy.
Expenses That Might Help on the Means Test
The following are some of the most common obligations you can deduct from your actual expenses on the means test. If you have high expenses in some of these areas, it may help you pass the means test.
• Taxes: Since you normally have to pay taxes on your income, you can deduct your tax obligations from your income on the means test.
• Involuntary deductions: These include deductions required for employment such as mandatory retirement plans, union dues, or uniforms. You can’t claim items that you have deducted from your pay voluntarily.
• Health, disability, or term life insurance: You are allowed to deduct the actual amounts you spend on health, disability, or term life insurance expenses.
• House, car, and other secured debt payments: A secured debt payment is one in which the creditor has a right to reclaim collateral such as a car or house if you fail to make your payment. Even if your mortgage or car payment is above the national or local living standards, you can normally deduct it in full on the means test. However, the means test looks at the total amount you will have to pay in the 60 months following the bankruptcy and averages your monthly obligation based on that amount. So if your car or mortgage will be paid off in less than 60 months, you can only deduct the 60-month average and not your entire current monthly payment.
• Court-ordered payments: If you are required to pay domestic support obligations such as alimony or child support, you can deduct these expenses on the means test.
• Child care: Expenses for needed child care such as babysitting, daycare, or preschool can be deducted from your income on the means test.
• Healthcare: If you incur more out-of-pocket health care costs (other than insurance) for the health and welfare of you or your dependents than the allowed national standard, you may be able to deduct the actual amount you pay.
• Education for employment or a disabled child: You can deduct your education expenses if those expenses are required for your employment or your mentally or physically disabled child.
• Charitable contributions: If you regularly made charitable contributions before bankruptcy and expect to continue making those contributions, you can deduct them on the means test. For instance, it’s common to deduct tithing, but expect to provide proof of prior payments.
• Care of a person who is elderly, chronically ill, or has a disability: You can deduct the amount you contribute towards the care of an elderly, chronically ill, or disabled family member or person in your household.
• Expenses for special circumstances: If you incur additional expenses for you or your family’s health and welfare because of special circumstances, you might be able to deduct them if you explain your situation to the satisfaction of the court. Special circumstances might include unusually high expenses after a natural disaster.
When you need a chapter 7 bankruptcy lawyer in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506