You aren’t automatically disqualified from receiving a discharge in Chapter 7 bankruptcy if your income exceeds the median income for your state. You might qualify after deducting allowed expenses. And, if you fall into an exempt category, you’ll qualify regardless of the amount you make.

Chapter 7 and Chapter 13 Bankruptcy: The Differences

Many people would prefer to file for Chapter 7 bankruptcy. It’s quick—it takes a matter of months as opposed to years—and a debtor (bankruptcy filer) doesn’t repay creditors.

By contrast, in a Chapter 13 case, the debtor must pay into a three- to five-year repayment plan. After successful completion, any balance remaining on a qualifying debt will get discharged (wiped out).

Qualifying for Chapter 7 Bankruptcy

You’ll automatically qualify if you make less than the median income in your state for your family size. When calculating your income, you’ll add up the money you receive from all sources (with a few exceptions), including:

• gross wages, tips, bonuses, and commissions
• alimony and child support payments
• household expense contributions (for instance, from a roommate, parent, or child)
• net income from a business or real estate
• unemployment compensation
• pension or retirement income, and
• income from any other source.

You won’t include Social Security payments (or funds received due to a war crime, a crime against humanity, or terrorism).

Next, you’ll compare your total income to the chart on the U.S. Trustee website. (After selecting the appropriate year, you’ll click on the “Median Family Income Based on State/Territory and Family Size” link.) If your income doesn’t exceed your state’s median, you’ll qualify.

But, even if your total income is greater than the median, you’re not out of the running. You’ll continue on and complete the “means test.”

(Learn more about the first section in Completing the Chapter 7 Statement of Your Current Monthly Income (Form 122A-1).)

Taking the Means Test

The means test allows you to deduct expenses from your income. When doing so, you’ll have to use predetermined amounts for things such as housing, utility, and food costs. (The figures are found in tables similar to the median income chart.) This rule prevents someone who lives a luxurious lifestyle from gaining a qualifying advantage. (Be aware that you can claim higher expenses when justified, such as if a medical condition requires you to purchase expensive food.)

You’ll be allowed to subtract the actual amount of other expenses, such as:

• income taxes
• childcare expenses
• life insurance costs, and
• tithing.

Additionally, you can exclude priority claims (bills that are entitled to payment before others) such as past-due tax debt and child support arrearages.

After you deduct your allowable expenses, you’ll arrive at your “disposable income.” This is the amount available to pay creditors.

(For more information, see Completing the Chapter 7 Means Test Calculation (Form 122A-2).)

Will You Qualify for Chapter 7 or 13 Bankruptcy?

Just because you have disposable income doesn’t mean that you’re automatically disqualified. The amount must be sufficient to justify a Chapter 13 case. For instance, you’ll have to file for Chapter 13 bankruptcy only if:

• your disposable income is above the threshold amount listed on the form, or
• your disposable income falls within the listed range and equals at least 25% of your nonpriority, unsecured debt.

So even if your income exceeds the median, if your disposable income is low enough, you’ll be entitled to a Chapter 7 discharge.

Are You Exempt From the Means Test?

You won’t need to worry about the median income requirement if you are:

• an individual whose debt is primarily business debt
• a disabled veteran who incurred most obligations while on active duty, or
• someone who fits within another military exclusion.

If you believe that you might be exempt, it’s best to confirm that status by consulting with a bankruptcy attorney.