Do I Qualify for Chapter 7 Bankruptcy?

To qualify for Chapter 7 bankruptcy, your disposable income must be low enough to pass the means test.

With the enactment of the Bankruptcy Abuse and Consumer Protection Act of 2005 ("BAPCA"), bankruptcy debtors are now required to pass a "means test" in order to qualify for Chapter 7 bankruptcy. Read on to learn more about whether you qualify to file for Chapter 7 bankruptcy.

For more information, see The Chapter 7 Means Test.

Passing the Means Test

In order to pass the means test, you must have little or no disposable income. To determine whether you qualify for Chapter 7 bankruptcy, the means test compares your average monthly income for the six-month period preceding your bankruptcy against the median income of a similar household in your state. If your income is below the median, you automatically qualify.

While the median income figures vary from state to state (my own location, Orlando, Florida, currently has a median income threshold of $41,065 for a household of one). In most cases, people who are having financial difficulties are making little or no income so the means test does not pose a problem.

Your Options If Your Income Is Above the Median

But what happens if your income is above your state's median? Many debtors think that such a scenario represents the endgame for them, that there is no way they can file a Chapter 7 bankruptcy with their income being so high. This is not necessarily true.

If your income is above median, you must complete the entire means test form instead of qualifying simply based on your income. The means test is essentially a balancing stage where your expenses are weighed against your income. But keep in mind that you can only use your actual expenses for certain items. For many expenses, the means test only allows you to deduct the national or local standard living allowance.

If deducting all allowable expenses from your income results in little or no disposable income, you can file for Chapter 7 bankruptcy. If your expenses are less than your net income, you probably cannot file a Chapter 7 (the "presumption of abuse" arises).  

While this may seem simple enough to determine, bear in mind that the "value" of a given expense depends on a number of complicated formulas.  For this reason, it is very important to speak with an experienced bankruptcy attorney before taking any course of action.

To learn more, see Can You Pass the Means Test If Your Income Is High?

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