At one time, Chapter 7 bankruptcy eligibility was left largely to the discretion of individual bankruptcy judges. As a result, most people who filed for bankruptcy filed for Chapter 7 so that they were more likely to have their debts discharged. Of course, this included many people who were financially able to repay their debts through a Chapter 13 plan.
The Means Test
In 2005, new legislation introduced the “means test.” This test required Chapter 7 petitioners to meet specific criteria, including comparing the previous six months’ income with the state’s median income.
Several forms of income are included in this assessment, including:
- Wages, salaries, tips, overtime, commissions and bonuses
- Gross income from a business or farm
- Rents and real property income
- Unemployment compensation
- Worker’s compensation
- Disability insurance
- Child support
- Spousal support
- Pension or retirement income
- Annuity payments
- Interest, dividends and royalties
If your income from all sources is equal to or below your state’s median income for a similarly sized household, then you will be eligible to file for Chapter 7.
If your income is higher than your state’s median, you might still be eligible for Chapter 7. You can deduct from your current monthly income just like you take deductions when filing taxes. Common deductions from current monthly income include:
- Food and clothing
- Utility expenses
- Housing expenses
- Transportation expenses
If your income is still too high, then you will need to file for a Chapter 13 bankruptcy. This means that you have enough disposable income to repay some of your creditors. A Chapter 13 bankruptcy is often called a reorganization bankruptcy because you will be creating a repayment plan with the court’s approval that will enable you to repay some or all of your debts.
Is Bankruptcy Right for You?
The rules governing bankruptcy can be complex. We can help you cut through the confusing legal language and determine your eligibility for both Chapter 7 and Chapter 13 bankruptcy. Bankruptcy can stop creditor harassment and give you a fresh start. Call us at 1-800-695-7674 for a free evaluation. A brighter financial future might be just around the corner.