When radical changes in the bankruptcy law were implemented in 2005, a new urban legend was born to the effect that almost no one could file for Chapter 7 bankruptcy anymore. Not true. In fact, pretty much anybody who could file before 2005 can file now.
To qualify for Chapter 7 bankruptcy, you must pass either the income test or the means test. Here is how they work.
The Six-Month Gross Income Test
You qualify for Chapter 7 bankruptcy if your annual gross household income (12 times your average monthly gross income in the six-month period prior to the month in which you file for bankruptcy) is below the annual median household income for your state. Add another $6,900 for each additional person.
To see whether or not you qualify under this income test, add up all your gross income for your household for the six calendar months immediately preceding the current month. Then multiply the total by two and compare it to the chart.
EXAMPLE: Preston and Megan live in Kansas with their three children. In September they examine their gross income from all sources (which includes bonuses, commissions, overtime, and even lottery winnings) for the months March through August. Their total income for that period is $36,600. They multiply that figure by two to arrive at an annual figure of $73,200.
They find that Kansas has a median annual household income of $69,831 for a family of four. They add the additional allowance of $6,900 for the fifth member of their household to arrive at a figure of $76,731. That is less than the Kansas median annual household income, which means they pass the income test and can file for Chapter 7 bankruptcy.
Figuring Your Gross Income
|Total household income for last six calendar months||$_____________|
|Average annual income||=||$_____________|
Median household income data. You can get the current numbers for households in your state by going to http://www.legalconsumer.com/. Click "Free Means Test Calculator" and enter your zip code.
If you wait, you may qualify later. If your income is higher than the median income for your state, based on your gross income for the previous six months, but your income has recently gone down, you might consider waiting for another month or two to file. The delay may render your income for the new six-month period low enough to produce an average below your state’s median.
The Means Test
If your household income is above the median for your state and household size, you may still be able to file for Chapter 7 bankruptcy if you pass what’s called the means test. You’ll have to show that your expenses and allowable deductions leave you with no money to repay some of your unsecured debts. (An unsecured debt is a debt that isn’t attached to particular collateral—for example, credit card debt.)
You can take the means test for free at http://www.legalconsumer.com/ by entering some basic information about your income and expenses. If you pass, you can file for Chapter 7 bankruptcy. If you don’t pass, that means the court considers you to have enough money to pay back at least some of your debts, perhaps by filing for Chapter 13 bankruptcy.
The Actual Income and Expenses Test
Even if you pass the income or means test, some bankruptcy courts will require you to file for Chapter 13 bankruptcy rather than Chapter 7 bankruptcy if, looking forward, your actual income will exceed your actual expenses by more than about $200 a month. This determination is based on the income and expense schedules that must be filed with every bankruptcy.