Not Everyone Can Qualify for Chapter 7 Bankruptcy
Despite its many disadvantages, chapter 7 bankruptcy is perhaps the most powerful form of debt relief – with a few exceptions, it discharges (extinguishes) all of the filer’s debt. While the pace of bankruptcy filings has slowed down considerably this year, bankruptcy filings continue at a historically high pace. Still, for many Americans, filing Chapter 7 is an unrealistic solution because they can’t qualify for it.
How to Find Out if You Qualify for Chapter 7 Bankruptcy
Assuming you can afford the costs associated with bankruptcy, in order to file Chapter 7 bankruptcy, you will have to meet one of two criteria. Either your current monthly income will have to be less than or equal to the state’s median income, or you must pass the “means test.”
Comparison to State Median Income
For bankruptcy purposes, your current monthly income is defined as the average monthly income you’ve received in the past six months. Sources of income include regular wages plus any tips, commission, bonuses or overtime you may have earned. Unemployment compensation and state disability insurance is also counted as income for bankruptcy purposes. In addition, you must include pension and retirement income, as well as any interest, dividends and royalties you receive, any spousal and/or child support payments you receive, and any net income from rental property you own. If you are filing jointly with your spouse, you will need to include both spouses’ income when calculating your current monthly income. Once you’ve identified your sources of income, simply add up the total income you received from all these sources during the past six months and divide by six to arrive at your average monthly income. Compare your income to the chart below. If your income is within these limits, you may qualify for Chapter 7 bankruptcy.
In California, the median income for a single earner household is $49,188 and for a two earner household it’s $63,481. In Arizona, it’s $42,691 for a single earner household and $55,479 for a two earner household.
Determination of Ability to Repay – The “Means Test”
If your income does not fall within that range, you still may qualify for Chapter 7, provided you pass the “means test.” Here, the focus is not how much you actually make, but what your disposable income is that matters. To determine what your disposable income is, the court subtracts specific allowed expenses from your current monthly income. Because some allowed expenses, such as food and clothing, are based on a national standard, and others based on a regional standard, the computations can get quite complex. Thus, it is often easier to use an online means test calculator, to approximate whether or not you will qualify. The higher your disposable income, the less likely it is that you’ll qualify for Chapter 7, because the court will determine that you have enough disposable income to at least pay back a portion of your debt by using Chapter 13 bankruptcy.
You Have Other Options
If you find yourself ineligible for Chapter 7 bankruptcy, you are more than likely a good candidate for debt settlement relief. An attorney negotiated debt settlement can eliminate your debt without bankruptcy. And it’s usually quicker and less expensive than a Chapter 13 bankruptcy. For more information on debt settlement and what it can do for you, contact the attorneys at McCarthy Law today for a free consultation.