Chapter 7 bankruptcy provides relief from debt by wiping out most unsecured debt and giving the debtor a fresh start. But not everyone qualifies for Chapter 7 bankruptcy. To prevent consumers from abusing the system, filers must meet eligibility requirements before receiving a debt discharge in a Chapter 7 case. You can wipe out debts only so often, so if you’ve filed for bankruptcy before, you’ll need to determine whether enough time has passed to file again. If you filed a previous Chapter 7 petition and received a discharge, you must wait eight years from the filing date of the prior bankruptcy before filing another one. If you filed a previous Chapter 7 case but didn’t complete it and didn’t receive a discharge, you can file a new Chapter 7 at any time, provided the court in the previous case didn’t bar you from filing again (and you otherwise qualify for Chapter 7). If you previously filed and received a discharge in a Chapter 13 bankruptcy case, you must wait six years from the date you filed the Chapter 13 before filing for Chapter 7. If you did not complete or receive a discharge in the previous Chapter 13 case, you can file a Chapter 7 case at any time assuming you otherwise qualified for Chapter 7.
Chapter 7 Pre-bankruptcy Credit Counseling
Before you file for Chapter 7 bankruptcy, you must complete a pre-bankruptcy credit counseling course conducted by an approved agency. You must complete this course within six months before the date you file for bankruptcy. Once the counseling is complete, you will receive a certificate that you must file with the court. You must also complete a debtor’s education course after you file your case.
Qualifying for Chapter 7 Bankruptcy by Passing the Means Test
Bankruptcy debtors must pass a Chapter 7 “means test” to qualify for Chapter 7 bankruptcy. To pass the means test, you must have little or no disposable income. The means test compares your average monthly income for the six months preceding your bankruptcy against the median income of a similar household in your state. If your income is below the median, you automatically qualify. The median income figures vary from state to state. In most cases, people who are having financial difficulties are making little or no income qualify, so the means test does not pose a problem. Keep in mind that not everyone has to take the means test. Find out if you can assert an exception to the means test requirement.
If Your Income Is Above the Chapter 7 Bankruptcy Median
Many debtors worry that they won’t qualify if their income is above the median allowed by their state. It isn’t necessarily true. You’ll have a second chance to qualify. If your income is above the median, you’ll take the second portion of the means test and deduct expenses from your income to determine whether you have any income remaining to repay creditors. But keep in mind that you can only use your actual expenses for particular items. For many expenses, the means test only allows you to deduct the national or local standard living allowance. You’ll find the national and local expense figures on the U.S. Trustee Program website in the means test area. If deducting all allowable expenses from your income results in little or no disposable income, you can receive a bankruptcy discharge in Chapter 7 bankruptcy. If your expenses are less than your net income, you probably won’t be entitled to a Chapter 7 discharge because the “presumption of abuse” will arise–the presumption that you have funds to repay creditors. While this might seem simple enough, the best way to get an accurate determination of your qualification chances is to speak with an experienced bankruptcy attorney.
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 (although they must be reasonable), taxes, and other expenses. Read on to determine if you can pass the means test and file for Chapter 7 bankruptcy.
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. 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.
Do You Have Enough Disposable Income to Repay Some Debts?
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 have different allowed amounts for categories of expenses, such as necessities, housing, and transportation.
Should I File A Business or Consumer Bankruptcy Case?
Why does it matter whether the bankruptcy is a consumer or business bankruptcy? 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, school supplies for your children, and costs for a gardener, housekeeper, or pool services are all examples of consumer debt.
If you’re looking for a way to determine your eligibility under the Chapter 7 means test, try filling out the means test forms. Fillable, downloadable forms are available online on the U.S. Bankruptcy Court’s website. Follow the instructions: they’ve been updated to be more user-friendly.
Here’s where you’ll start:
• Form 122A-1. The first means test form, Chapter 7 Statement of Your Current Monthly Income (Form 122A-1), determines whether your income is below the median income for your state. If it is, you qualify for a Chapter 7 bankruptcy and don’t need to fill out the other two forms.
• Form 122A-2. If your income is above the state median, you still might qualify. You’ll find out by completing the Chapter 7 Means Test Calculation (Form 122A-2). On this form, you’ll deduct allowed expenses and determine whether you have sufficient disposable income to pay into a Chapter 13 bankruptcy plan.
• Form 122A-1Supp. Some people—such as certain members of the military—don’t have to take the means test at all. You’ll fill out Statement of Exemption from Presumption of Abuse Under § 707(b)(2) (Form 122A-1Supp) to determine whether you’re exempt from the 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. Any decision to file for Chapter 7 bankruptcy should be made after considering alternatives.
If You Don’t Pass the Chapter 7 Means Test Call Ascent Law to Discuss Your Options
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.
How to Calculate Income for the Chapter 7 Means Test
The first step is to gather proof of income for the past six months. Income for the Chapter 7 means test is based on income for the six months before you file your Chapter 7 cases. Therefore, if you file your Chapter 7 bankruptcy petition on March 15, you need to report all income from January 1 through March 30. Income includes income earned and income received from all other sources, except income from the Social Security Act. Income received from Social Security retirement income, SSDI, and SSI are not included in income for the Chapter 7 Means Test.
Examples of income used for the Chapter 7 Means Test include:
• Wages and salaries, including overtime, bonuses, and commissions
• Net income from self-employment or operation of a business
• Net income from rental property
• Unemployment income
• Workers’ compensation income
• Interest, royalties, and dividends
• Annuities, retirement income, and pensions
• Private disability insurance income
• Child support and spousal support
• Regular income contributed by another person for household expenses, such as a non-filing spouse’s income and money from a roommate, domestic partner, parent, or friend.
When you need legal help with a chapter 7, 13, 11, or 12 bankruptcy 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