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Do I Qualify For Chapter 7 Bankruptcy?
Individuals filing for bankruptcy have choices. One of the first decisions is whether to file for bankruptcy under Chapter 7 or 13. There are guidelines as to who qualifies for relief under each bankruptcy chapter.
BAPCPA's "means test"
Most of the qualifications focus on a prospective debtor's income. If that income is too high, then the prospective debtor has no choice, and she must file bankruptcy under Chapter 13 and repay at least a portion of her debts. One of the most stringent gate-keeping tools in the bankruptcy system was built into legislative reforms passed in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). That tool is the "means test."
The means test was created to prevent prospective debtors from filing for Chapter 7 bankruptcy when they are able to repay at least some of their debts under a Chapter 13. The means test no longer allows that abusive practice to occur and kicks those debtor candidates into Chapter 13 and out of Chapter 7.
What is the income threshold for eligibility to file Chapter 7? A prospective debtor's income is too high to file Chapter 7 if that income (average gross for six months) is greater than the median income in debtor's home state. The means test involves several layers of analysis and calculations (some subject to legal interpretation), and because of the significance of the outcomes of these calculations for eligibility for bankruptcy, it may be prudent to consult with bankruptcy counsel.
The means test involves an analysis of these factors:
- The means test specifies what factors to include in income for the purposes of performing these calculations.
- The means test specifies what the state median income is for purposes of comparison to your own income.
- The means test sets forth additional factors that might permit a prospective debtor to file for Chapter 7 relief despite having an income above the state median.
If a prospective debtor's income is below the state median, she qualifies for Chapter 7. However, if her income exceeds the state median, she may still qualify for Chapter 7, but more detailed calculations are necessary.
More complex cases
The means test then focuses on a calculation of disposable income for five years. That sum is debtor's current income minus expenses that are deemed allowable. Allowable expenses include living, housing, transportation and necessary expenses.
Disposable income analysis
The test then dissects disposable income to make further Chapter 7 qualification determinations. Here is the breakdown of how to evaluate disposable income and determine if Chapter 7 eligibility exists:
- If a debtor's disposable income is below $6,000, she qualifies for Chapter 7.
- If a debtor's disposable income is between $6,000 and $10,000, and debtor can pay at least 25 percent of her unsecured debt, then she does not qualify for Chapter 7.
- If debtor cannot pay at least 25 percent of unsecured debt, then she qualifies for Chapter 7.