Here’s a great bankruptcy question sent to me on Facebook. My reply was too long to post directly to my Facebook page, so I made it a blog post instead:
Q: Is there a debt ratio used when filing bankruptcy… meaning can I make too much money to file a Chapter 7?
A: Most people file for bankruptcy relief under Chapter 7 because it wipes out their debts immediately, they usually can keep all of their assets, and they don’t have to pay anything on their credit cards, payday loans, hospital and medical bills, and most other unsecured debts. But the credit card companies lobbied Congress to make it harder to file and now you must pass a “means test” to determine if your income is too high to qualify for Chapter 7.
The means test is divided into two sections. Section 1 compares your income to the median income in your state for your household size. The state median income amounts are updated regularly and are available at the following link: http://www.justice.gov/ust/eo/bapcpa/20110315/bci_data/median_income_table.htm.
Add up your monthly income over the past six months and multiply by two. If the result is below the median annual income for your state and household size, you can breathe a sigh of relief because you “pass” the means test and you don’t have to complete Section 2. However, you may still qualify for Chapter 7 even if you “flunk” Section 1 of the means test because your income exceeds your state’s median income. In this case, you must take Section 2 of the means test.
In means test Section 2, you calculate your monthly “disposable income” by reducing your average monthly income by certain allowable expenses. You will pass the means test if: (1) Your monthly disposable income is below $117.08; or (2) Your disposable income is between $117.08 and $195.41 AND your nonpriority unsecured debts (such as credit cards and medical bills) total more than $46,898.40. Otherwise, you will “flunk” the means test, unless your attorney can demonstrate special circumstances that justify deducting additional expenses.
If you fail the means test, you may be forced to file for chapter 13, which provides you with debt relief, but requires that you commit all of your disposable income to paying down your debts over 3 to 5 years. Properly completing the means test to qualify for Chapter 7 is a complex exercise. This is one example of how a trusted bankruptcy attorney is essential to successfully navigating the complexities of a bankruptcy filing.
If you are considering filing for bankruptcy, call me at (773) 429-0400 or book an appointment online at www.alvinforeman.com to arrange a FREE, no-obligation consultation. I will evaluate your situation and determine whether bankruptcy is right for you and whether you qualify for Chapter 7 relief.