According to national statistics, 7 out of every 10 people filing for personal bankruptcy choose Chapter 7 liquidation over Chapter 13 reorganization. In a one-year period ending March 31, 2012, there were 958,757 Chapter 7 filings, compared to 396,175 Chapter 13 filings. The reasons are fairly clear: A Chapter 7 discharge is possible within three to six months, while virtually all Chapter 13 cases require a five-year reorganization plan. In addition, Chapter 7 filers often do not lose any property because of state and federal exemptions.
Chapter 7 Income Limit
So unless you are trying to protect property from foreclosure, chances are you will want a Chapter 7 bankruptcy. But what if your household income is relatively high? Since the 2005 overhaul of the bankruptcy code, Chapter 7 filers must meet an income threshold in order to qualify. If you earn less than the median income in the state, considering the number of people in your family, you are free to seek Chapter 7 bankruptcy protection. For a family of four in Illinois, for example, the median income as of May 2012 was $81,570.
However, it’s important to understand that a household income above the median in the state doesn’t necessarily mean a Chapter 7 is out of reach. Instead, there is a complicated formula that an experienced bankruptcy lawyer can help you navigate called the “Means Test.”
The idea behind the Means Test, introduced with the 2005 changes to the federal bankruptcy law, is to ensure that debtors who can afford to pay at least some money to creditors choose a Chapter 13 filing. The ultimate goal of the complex mathematical formula is to determine if the debtor has enough disposable income, after bills are paid, to disburse to creditors.
Understanding the Means Test
There has been some criticism of the Means Test over the years because of its complexity and the uniqueness of the calculation. For example, the average income for the calculation isn’t based on what a debtor currently earns. Instead, the Means Test requires that the debtor determine the average of the last six months of income. Also, the expenses calculated for the test do not match the debtor’s current expenses. Instead, expenses are calculated based on both national and local standards, and not a debtor’s actual expenses. For example, for the expense categories of food, housekeeping supplies, apparel and services, personal care products and services and miscellaneous, there is a national figure to use, which is updated regularly. Only in some expense categories, such as mortgage and car payments, can a debtor include their actual payments in the Means Test calculation.
Once the income and expenses are calculated, the amount left over, if any, will decide if a debtor has enough disposable income to qualify for a Chapter 13 filing. If the anticipated disposable income for a five-year period exceeds $10,000, that triggers a presumption that the debtor can afford to make payments to creditors and should file under Chapter 13. If a debtor’s disposable income is below $6,000 for the five-year period, they likely will qualify for Chapter 7 bankruptcy. If a debtor’s disposable income falls between $6,000 and $10,000, that triggers – you guessed it – another calculation. This formula takes a look at the amount of disposable income compared to the level of unsecured debt. If the debtor’s disposable income, project for a five-year period, is more than 25 percent of the total unsecured debt, the debtor will likely be denied a Chapter 7 filing. If the percentage is less than 25 percent, the debtor will most likely survive the Means Test and be allowed to continue with a Chapter 7 filing.
Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.