Qualifications for Chapter 7

Who might not qualify for Chapter 7 bankruptcy

If you have concluded that you need to file for personal bankruptcy, you face the choice of filing under Chapter 7 or Chapter 13 of the US Bankruptcy Code.

However, if your income is too high, you will not have a choice: in that case, only Chapter 13 will be available for you. The federal bankruptcy reform of 2005 created the Means test, to prevent use of Chapter 7 by individuals who were considered capable of repaying at least a portion of their debts through a Chapter 13 plan. For such people, the use of Chapter 7 is considered an “abuse” of the bankruptcy code.

The following explains the Means test in more details.

How high an income is too high for Chapter 7?

In principle, your income is too high for Chapter 7 if it exceeds the median income for your state.

The devil is in the details, as they say. The law prescribes details for:

  • What to include in your income
  • What state median income to compare with
  • Factors that may allow you to use Chapter 7 even if your income is above the median.

Your income vs. state median income

For this decision, your income is your average gross income (i.e. income before taxes) for the last six calendar months, excluding any benefits under the Social Security Act.

If you are married, your spouse’s income is included, unless you are filing separate tax returns and have declared separate households.

The state median income used for comparison is:

  • The Census Bureau’s figure for median personal gross income in your state,
  • Of people who have the same number of people in their household as you,
  • Adjusted for inflation since the last census.

By the definitions above, if your income is less than the state median, you do qualify to file for bankruptcy under Chapter 7.

Even this calculation may be affected by legal interpretation, such as whether unemployment compensation is a benefit under the Social Security Act. You will need the advice of a bankruptcy lawyer to be sure the calculation is sound.

More complex cases

If you income is more than the state median, you may still qualify to use Chapter 7, but more detailed calculations must be done.

The next step is to calculate your Disposable Income (DI) (by the bankruptcy reform definition) for 60 months (five years). This is your current income less allowable expenses.

  • If this DI is less than $6,000, you do qualify for Chapter 7.
  • If this DI is more than $10,000, you do not qualify for Chapter 7.
  • If this DI is $6,000-10,000, then the rule is:
    • if you can pay at least 25% of your unsecured debt, you do not qualify for Chapter 7.
    • if you cannot pay at least 25% of your unsecured debt, you do qualify for Chapter 7.

The expenses allowable for calculation of your 60-month Disposable Income include:

  • IRS standard allowances for living, housing, transportation and other “necessary” expenses
  • Some other expenses defined in the bankruptcy reform law.
  • Debt payments on secured and priority debts and likely administrative costs of a Chapter 13 plan.

Many of these expenses vary according to your income, marital status, family size, county of residence, and other factors.

As you can see, the calculation requires a database of up-to-date statistics. Several parts of the calculation may also be affected by legal interpretation. This is another aspect of bankruptcy where the advice of a bankruptcy lawyer is essential.

Summary of Chapter 7 qualifications

If your income is exceptionally low or high, you may be able to conclude, from the information above, that you probably do or probably don’t qualify (respectively) for Chapter 7.

We cannot provide a calculation of whether you qualify to file for Chapter 7 bankruptcy. It would be too complex, too hard for you to do accurately, and too subject to interpretations requiring legal opinion.

In any case, we believe it is useful for you to understand the principles involved as you consider bankruptcy.

Where do I go from here?

Before filing for bankruptcy, it is essential to consult a bankruptcy lawyer, who can advise on your rights and options, based on your circumstances.