What is the Income Limit for Filing Chapter 7 Bankruptcy?

For many individuals that want to get out of debt, Chapter 7 bankruptcy may be the best option. The main benefit of filing for bankruptcy relief is the financial fresh start that a debtor receives with their bankruptcy discharge. Before you can file your case and get your discharge, however, there are a few things that you need to consider when preparing your bankruptcy petition (beyond just completing a credit counseling course). One of these items dives into looking at your average household income to ask whether you make too much money to file bankruptcy. So, it’s important to know: what is the income limit for filing chapter 7 bankruptcy?

Understanding the Bankruptcy Income Limit for Chapter 7 Bankruptcy Cases

Bankruptcy law seeks to strike a balance between protecting people that cannot pay back their debts with the rights of a creditor (especially in chapter 7, where, unlike secured debt, unsecured creditors will lose all rights to try and enforce their respective unsecured debt). As a result, a person’s monthly income level is one of the biggest factors that determine whether someone may qualify for chapter 7 bankruptcy. While a current snapshot of a person’s current monthly income and living expenses is part of the bankruptcy case analysis, another part of qualifying for bankruptcy under chapter 7 looks at a person’s annual income. As a result, understanding what is the income limit for filing chapter 7 bankruptcy cases is really important when planning to prepare file your bankruptcy petition.

Why Household Size and Median Income Limits Are Important in Chapter 7 Cases

As mentioned above, the bankruptcy income limits are important because they serve as the objective scale when balancing the rights of creditors to enforce a debt versus the desire of a person to receive a discharge of their debts. Although maybe not the perfect scale to measure against, the monthly income and annual income of a person versus the median income of a household of a similar size may be indicative of whether there should be disposable income – money left over each month for debts to be paid.

While the bankruptcy income limit does not prevent you from filing a Chapter 7 bankruptcy case, if it turns out that you are an above median debtor (where your current income is greater than the median household income figure), then your bankruptcy filing will raise a presumption of abuse, and likely be dismissed or converted to a chapter 13 case upon motion of the bankruptcy trustee.

How to Calculate Monthly Income for the Chapter 7 Means Test Forms

Put plainly, the chapter 7 means test looks at your gross income from all sources for the last 6 calendar months to calculate the average income. That monthly income figure is then multiplied by 12 to annualize your income. This annual income figure is then compared to the median income figure for a household of the same size in your state.

When figuring out all income from all sources, be sure to look at money received LITERALLY from every source. Common types of income sources to consider include:

• Wages and salaries, including overtime, bonuses, and commissions;
• Business income (note that business income can come from any source, whether from self-employment or operation of a more formal business);
• Rental income;
• Unemployment income;
• Workers’ compensation income;
• Interest, royalties, and dividends;
• Annuities, retirement income, and pensions;
• Private disability insurance income;
• Money paid as domestic support obligations;
• 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;

Some kinds of income received, including most Social Security income, are not included in currently monthly household income for the Chapter 7 Means Test (although they do get counted as income in your current budget).

In many cases, what I’ve seen as a bankruptcy attorney is that people will “make too much money” to file for bankruptcy under this initial analysis. That is, the means test shows disposable income to pay back unsecured debt. Often, this is the result when there is a higher income filer. Not to fear, however, because the means test has a secondary analysis. In this second level of calculation, a person can reduce their average household income by certain allowable expenses. Because the initial average income calculation just looked at gross income, these allowed expenses are designed to reflect your actual expenses, and more closely reflect real life, so the resulting total monthly income here should be more close to reality.

An allowable expense tends to be limited to what the bankruptcy code has deemed a necessary expense. The list of allowed expenses you can include to reduce your average monthly income is varied, but some of them include:

• payments of some secured debt, such as car loans or mortgage payments;
• education expenses for dependents
• income withholding, including deductions like union dues, other mandatory payroll deductions and health insurance;
• health care expenses, including out of pocket health care costs;
• transportation costs, whether public transportation costs or vehicle operating costs
• a marital deduction for expenses incurred by a spouse and strictly for the spouse (such as medical bills or credit card debt that exclusively of the spouse)
• your projected monthly payment in a chapter 13 plan

Even after deducting allowable expenses, if your current monthly income still raises the presumption of abuse, there is one final test that allows you to describe any special circumstances, and compare your monthly net income over the next 5 years to a threshold amount. If your 5 year net income is less than this figure, you can file chapter 7 bankruptcy without raising the presumption of abuse. If your figure is greater, your only option may be filing for bankruptcy relief under a chapter 13 plan.

Not Everyone Is Subject To The Chapter 7 Income Limits: Exemptions to Means Test Calculation

While there is a lot that goes into figuring out the means test and income limits contained in them, something that you may want to look at before going to work on the means test and bankruptcy income limits is whether they apply at all. The bankruptcy code includes a few circumstances that would make someone exempt from the means test calculation.

The first circumstance that would make someone exempt from the means test would be non-consumer debt. Generally speaking, if more than 50% of your debt is considered non-consumer debt (these types of debts are usually business debts), you are considered exempt from the means test calculation. There may be some inquiry by a trustee to demonstrate that more than 50% of your debt is business debt (and questions about business may raise other kinds of issues). Notwithstanding, if more than half of your debt is non-consumer debt, you are considered exempt from satisfying the means test.

Another circumstance that would make someone exempt from the means test calculations would be for qualifying. service members and veterans. Generally speaking, disabled veterans, reservists called to active duty and members of the national guard are not required to count compensation connected to their service as part of the bankruptcy means test. (Also keep in mind that certain servicemembers may also be exempt from having the credit counseling certificate at the start of the chapter 7 case).

If you believe that you fall under one of these two exemptions to the means test, be aware that there is some extra paperwork that you must prepare and file with the bankruptcy court to declare the exemption.

Do You Have Enough Disposable Income to Repay Debts?

After all of these calculations, and comparing your current monthly income to median income, what happens if your income remains high enough to raise the presumption of abuse? One outcome, as mentioned previously, is that the bankruptcy trustee may seek a dismissal of your bankruptcy case as presumptively abusive.

Another option (and a good option, especially if you are filing bankruptcy to stop enforcement of a debt, such as a foreclosure, wage garnishment or bank account freeze) may be to convert your case to a chapter 13 case. In some cases, the bankruptcy trustee may seek to have your case converted to a chapter 13 case not only if you have too much money according to the chapter 7 means test, but also if you have too much money left over each month according to your current monthly budget.

What Happens If You Don’t Pass the Chapter 7 Means Test?

If you can’t find a way around the means test, and you can’t reduce your average monthly income to more closely align with the median income limit for your household size, filing for Chapter 13 bankruptcy may be your remaining option, which requires you to make monthly payments over a three- to five-year period according to a repayment plan you create. Generally, if you can file a chapter 7 case, you should do so. If not, however, Chapter 13 bankruptcy may be a great way to handle certain problems, like curing a default on a mortgage, dealing with all of your unsecured debts (and unsecured creditors) in one place, or if you have certain nonexempt property that you would lose in chapter 7 bankruptcy.

Miscalculating the Means Test Can Lead to a Presumption of Abuse! Don’t Miss Out On Your Bankruptcy Financial Fresh Start! Contact Bankruptcy Attorney Richard Kistnen Today!

Imagine what your day would be like if you weren’t held down by the burden of debt! Filing for chapter 7 bankruptcy case may be the fastest and easiest way, thanks to the financial fresh start that the debtor receives with his or her bankruptcy discharge. There are a few hurdles along the way, including determining rights around secured debt, household expenses, the means test and bankruptcy income limits.

If you want to know more about how the income limits in chapter 7 bankruptcy apply to you as a debtor, be sure to check out the Chapter 7 Bankruptcy Webinar here . If you want to prepare and file your own chapter 7 case and need a little bit of help, be sure to check out the Chapter 7 Bankruptcy Course here . If you want bankruptcy relief now, and want an experienced bankruptcy lawyer to prepare and file your bankruptcy petition (as well as appear with you in bankruptcy court), then contact the Law Office of Richard Kistnen today by calling (718) 738-2324 or book your confidential, no obligation consultation here!