What Are the Income Limits for Chapter 7 Bankruptcy

Eligibility for Chapter 7 bankruptcy depends on passing a means test that compares household income to the median income for a filer’s state and family size. Filers whose income falls below the state median generally qualify automatically. Those above it must pass a more detailed calculation involving disposable income and allowed expenses. Income limits change based on family size and location, so what qualifies in one household may not work for another. Keep reading to learn more.

Basics of the Means Test

Debtors must pass a means test to qualify for the Chapter 7 bankruptcy process. This test compares household income against the median state income for families of that size in your state. If your income falls under that median amount, you have already passed part one and don’t need to calculate additional expenses separately.

If your income exceeds the median, you must complete part two of the test based on expenses. This involves subtracting allowed monthly expenses from income to arrive at your disposable income figure – if it exceeds this amount, Chapter 7 might not be right for you.

State Median Income Vs Household Expenses

Step two of the means test compares your current income with the state-wide median household income for families of similar size in your state. If your income falls under this median threshold, you have passed and can file Chapter 7 bankruptcy, which will benefit your family.

How To Calculate?

Begin your calculation by adding all your gross income for the past six months and dividing it by six to obtain your gross monthly income figure. This figure includes wages, rental income, child support payments, alimony payments, and retirement funds, but it does not include Social Security payments or welfare payments.

Subtract allowed deductible expenses from total income to determine how much disposable income you have. If it falls under your state median amount, check box 40 on bankruptcy forms and proceed with calculations regarding nonpriority unsecured debt. Otherwise, more complex calculations based on local law must be conducted to see if Chapter 7 applies to your situation.

Calculating Current Monthly Income Deductions

Filling out a means test form requires several calculations based on its instructions. For instance, it asks you to list your income over six months before filing a bankruptcy case and calculate eligible deductions that include expenses such as housing or health care costs that fall under national standards.

Once you’ve listed your eligible deductions, the bankruptcy court will subtract this total from your average monthly income to develop your disposable income figure. The higher it is, the more likely you’ll fail the means test and be disqualified from filing Chapter 7 bankruptcy.

Instead, Chapter 13 bankruptcy allows debtors to keep their assets while spreading debt repayment over three to five years. One advantage of Chapter 13 over Chapter 7 is that unsecured debts like credit card balances and medical bills will be discharged after your bankruptcy plan—this is also one way of eliminating unsecured debt that won’t require passing a means test like Chapter 7.

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Passing the Means Test

If your income falls below the median for your state and household size, you have successfully passed the Chapter 7 means test. However, it can be more complex for those earning above this median threshold; deductions and allowances may help those earning above the median pass the test, such as tax withholdings, insurance costs, auto expenses, charitable donations, etc.

Alternatively, if your debt consists primarily of non-consumer debt, such as business or military loans, you may also be exempt from the means test. We can ensure all deductions are properly made to avoid passing this tricky calculation incorrectly and to help ensure all deductions pass the means test correctly.

If this test doesn’t pass correctly, Chapter 13 bankruptcy might be an option; otherwise, you might require debt-relief options like Chapter 13. With our assistance, you could quickly return on track!

Exceptions to Income Limits

There is no one-income threshold that automatically qualifies a person for Chapter 7. Instead, the bankruptcy means test uses three factors to assess your disposable income to repay creditors: state median income levels, earnings amounts, and any eligible expenses you may have incurred.

What is the Income Limit Law?

Chapter 7 bankruptcy law makes it clear that to qualify for Chapter 7, you must pass the means test. This involves performing an intricate calculation that compares your annual income with the median income for households of your size in your state. Find this chart on the U.S. Trustee Program’s website with drop-down menu options displaying it by state and household size, as well as your results from this means test.

If your earnings fall below the median income threshold, then you pass the means test and can move on to calculating your monthly disposable income. Individuals on the verge of passing may require outside assistance adjusting their income to ensure eligibility; they might also benefit from filing Chapter 13 instead of Chapter 7. Chapter 13 allows debts to be paid off over three years.

Conclusion

Calculating allowable expenses can be complex. The Pope Firm can ensure that your expenses are calculated accurately to give you the best chance of passing the means test and qualifying for Chapter 7. Furthermore, we can take advantage of your available deductions that reduce disposable income to increase your chances of passing and qualifying for Chapter 7. If you need help or are uncertain whether you will pass, contact us so we can arrange a consultation session to go over what must happen to pass it successfully!

Buried in Debt? Contact The Pope Firm Now!

Overwhelmed by debt and considering bankruptcy? The Pope Firm is here to help you. We offer bankruptcy solutions, including Chapter 7, Chapter 11, and Chapter 13 bankruptcy services. Whether you’re looking to declare bankruptcy in Tennessee or determine if you qualify, our team will guide you every step of the way.

Don’t let financial stress control your life. Contact The Pope Firm today for a consultation.

Got Questions?

Frequently Asked Questions

What is considered high income for Chapter 7?

A: Income above your state’s median for your household size is considered high for Chapter 7, requiring you to pass a more detailed means test to qualify.

Can I file Chapter 7 if I make 100k a year?

A: Yes, filing with a $100k income is possible if allowed expenses and deductions bring your disposable income low enough to pass the means test.

How hard is it to get approved for Chapter 7?

A: Approval difficulty depends on passing the means test and having limited disposable income. This makes it straightforward for low-income filers but harder for higher earners.

Do they freeze your bank account when you file Chapter 7?

A: No, filing Chapter 7 bankruptcy does not automatically freeze your bank account, though funds above exemption limits could be at risk (depending on your case).

What would disqualify you from Chapter 7?

A: Failing the means test, having filed a previous bankruptcy too recently, or not completing required credit counseling can disqualify someone from Chapter 7.

Can you get an 800 credit score after Chapter 7?

A: Yes, rebuilding to an 800 credit score after Chapter 7 bankruptcy is possible over several years with responsible credit use and consistent on-time payments.

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