Qualifying for Chapter 7 Bankruptcy

One of the most common questions about bankruptcy we get is: “Do I qualify for Chapter 7?” While there are various ways to qualify for bankruptcy, the easiest way to qualify is if your income is below the median in the state for your household size. The median income is usually adjusted every six months for changes. If you income is below, then you should qualify. If your income is above the threshold, then there is a more complex analysis needed. The included chart is the current median income for bankruptcy qualifications in Virginia. The way the court calculates your income is not based on your taxes or your salary, it is based on the last six months of income. As a result, your income could be higher or lower than what you anticipate making going forward.

Means Test

Even if someone earns above the median income, he/she may still qualify. The most common way someone qualifies for Chapter 7 and is above the median income, is having negative disposable income on the Means Test. Basically, the Means Test is the court’s way of making sure that the debtor is truly in financial trouble and cannot afford to pay back their creditors.  If a debtor has more income than expenses in the means test, they may be forced to file a Chapter 13 case and repay some of their debt. The Means Test uses some actual expenses, like mortgages, taxes, health costs, etc. in the analysis and some standardized expenses, like food, rent, utilities, etc. based on IRS standards for your county and household size.

Our office is located in northern Virginia where we have some of the highest incomes and highest costs of living in the country. So it is common for our clients to have to complete the Mean Test. Remember that the automatic qualification level is a state-wide income threshold. As a result, it applies to people living in Roanoke the same way it applies to someone in Arlington. As a result, being able to use county based expenses becomes extraordinarily important in qualifying for many of our clients. With higher income clients, being able to have an experienced bankruptcy attorney review your situation and determine what expenses are allowable becomes very important. A skilled and seasoned bankruptcy lawyer will also help determine if there are expenses that the person has forgotten or may be allowable, even if only paid once or twice a year.

Business Debts/Non-Consumer Debts

One exception to the Means Test is for people who primarily have non-consumer and/or business debts. The Means Test only applies to individuals whose debts are primarily “consumer debts,” as opposed to business debts. Consumer debts are usually considered debts that directly benefit the person’s household. The courts have regularly defined this to mean that if more than 50% of the debtor’s debts are non-consumer debts or business debts, the debtor is automatically eligible to file for Chapter 7 bankruptcy without doing the means test, and the presumption of abuse does not apply.

When looking at all whether a person has primarily non-consumer debts, the court considers all debts, including mortgages, student loans, taxes, alimony, credit cards, etc.

Considerations

Now just because you qualify for Chapter 7 does not mean you should file. Bankruptcy is a legal and financial decision that can have consequences. Chapter 7 is also called a liquidation because assets may be used to pay debt, if you have assets over what is allowed. While many people keep most/all their assets, it depends on the specifics of your situation.

Potential debtors should considered many other factors besides just do you qualify for Chapter 7. These issues likely include assets, recent transactions, goals, timing, etc. For example, if Megan earns a below median income, but she has substantial non-exempt equity in her home, she may not want to file a Chapter 7 due to the risk of her house being sold.

Every person has a unique situation; recommendations will vary from person to person. You should contact an experienced bankruptcy attorney before filing bankruptcy. Use the form below to contact our office and set an appointment with one of our friendly and knowledgeable bankruptcy lawyers.