How Much Can I Make and Still File Chapter 7?

Chapter 7 bankruptcy offers a path for individuals to discharge eligible debts, providing an opportunity for a fresh financial start. While this process can alleviate significant financial burdens, eligibility is not universal. Several factors determine who qualifies, with income being a primary consideration. The “Means Test” serves as the principal tool used to assess an individual’s income eligibility for Chapter 7.

Understanding the Income Requirements

Determining eligibility for Chapter 7 bankruptcy begins with a thorough assessment of an individual’s income. For bankruptcy purposes, “income” encompasses household income and gross income from all sources, including wages, salary, tips, bonuses, interest, dividends, royalties, retirement income, unemployment, and workers’ compensation, along with regular contributions from others within the household. This income calculation typically uses a “six-month lookback period,” meaning the average monthly income over the six full calendar months preceding the bankruptcy filing is considered.

The first step in the Means Test is the “median income test,” which compares a debtor’s household income to the median income for a household of the same size in their specific state. If the debtor’s current monthly income falls below their state’s median income for their household size, they generally qualify for Chapter 7 without further income analysis. This means they are presumptively eligible to proceed with a Chapter 7 filing.

However, if a debtor’s income is above the state median, they must proceed to the second part of the Means Test, which involves a more detailed calculation. This additional step determines whether they have sufficient disposable income to make payments to creditors. While most consumer debtors must pass the Means Test, certain exceptions exist, such as for disabled veterans or individuals whose debts are primarily non-consumer in nature.

Applying the Means Test

For individuals whose income exceeds the state median, the full Means Test calculation becomes necessary to determine Chapter 7 eligibility. This detailed assessment evaluates whether a debtor possesses enough disposable income to make payments to creditors under a Chapter 13 repayment plan. The test identifies specific allowable deductions from the debtor’s current monthly income.

These deductions include standardized national and local expense standards, which cover categories such as housing, transportation, food, and clothing. Additionally, actual necessary expenses can be deducted, encompassing items like healthcare costs, childcare, taxes, court-ordered payments, and payments on secured debts such as mortgage or car loans. Business expenses for self-employed individuals are also considered in this calculation.

After applying these deductions, a “disposable income” figure is derived. This figure represents the amount of income remaining after accounting for reasonable and necessary expenses. The calculated disposable income is then compared against a specific threshold to determine if a “presumption of abuse” arises.

If the calculated disposable income exceeds a certain amount over a five-year period, a presumption arises that filing Chapter 7 would constitute an abuse of the bankruptcy system. In such cases, the bankruptcy court may convert the Chapter 7 case to Chapter 13 or dismiss it entirely. The Means Test calculation is complex, involving various forms and specific legal interpretations, making consultation with a qualified bankruptcy attorney advisable.

Other Eligibility Criteria for Chapter 7

Beyond the income requirements assessed by the Means Test, several other non-income-related criteria must be satisfied to file for Chapter 7 bankruptcy. One significant factor involves previous bankruptcy filings. Generally, there are time limits for receiving a discharge in a prior bankruptcy case.

All individuals filing for Chapter 7 bankruptcy are mandated to complete an approved credit counseling course. This course must be finished before the bankruptcy petition is filed. Following the filing of the bankruptcy case, but prior to receiving a discharge, debtors must also complete a debtor education course.

Furthermore, a debtor might be barred from refiling immediately if a previous bankruptcy case was dismissed within the preceding 180 days due to the debtor’s failure to appear in court, non-compliance with court orders, or if the case was voluntarily dismissed by the debtor after a creditor sought relief from the automatic stay. Chapter 7 bankruptcy is generally intended for individuals with primarily consumer debts, although certain business debts may also be eligible for discharge.

Alternatives When Chapter 7 Isn’t an Option

When an individual does not qualify for Chapter 7 bankruptcy, either due to their income exceeding the Means Test limits or not meeting other eligibility criteria, alternative solutions are available. The most common alternative within the bankruptcy system is Chapter 13 bankruptcy. Chapter 13 is a reorganization bankruptcy that allows debtors to propose a repayment plan to their creditors over a period of three to five years.

This type of bankruptcy enables individuals to retain their assets while repaying a portion of their debts according to a court-approved plan. Unlike Chapter 7, which focuses on liquidation and discharge, Chapter 13 emphasizes repayment. For those seeking alternatives outside of bankruptcy, options like debt consolidation, debt management plans, or direct negotiation with creditors may be considered.

Debt consolidation involves combining multiple debts into a single loan, often with a lower interest rate, to simplify payments. Debt management plans are typically administered by credit counseling agencies, where the agency negotiates with creditors on the debtor’s behalf to establish a more manageable repayment schedule. While these non-bankruptcy options can provide some relief, they may not offer the same comprehensive debt discharge or legal protections as a bankruptcy filing.