Income Threshold & Means Test: Eligibility Criteria for Chapter 7 Bankruptcy
The income threshold is the first hurdle to clear for qualifying under Chapter 7 bankruptcy. Eligibility is determined by comparing your household income to the median income for similarly sized households in your state, which is determined by the most recent U.S. Census data. If your income is below the median, you automatically qualify for Chapter 7 bankruptcy.
When figuring out if your household income qualifies you for Chapter 7 bankruptcy, you need to make sure you’re using data from households of the same size and in the same state. Using median income data that doesn’t account for state or household size could be misleading. For instance, a household of one in Washington, DC has a different median income threshold compared to a household of four in Iowa. Consider consulting recent median income data or seeking professional advice to ensure you’re working with accurate figures.
If your income exceeds the median, you must proceed to Step 2: the means test calculation.
The means test calculation measures your disposable income. This requires filling out financial forms 122A-1 and 122A-2, which guide you through the necessary steps. You’ll need detailed information about your income over the past six months, including wages, bonuses, and any other income sources. You’ll list your allowable expenses, which are deducted from your reported income.
Allowable expenses include any costs related to:
- Housing
- Utilities
- Food
- Transportation
- Healthcare
The figure that remains after deducting survival costs is your disposable income. If your disposable income is below the median income figures for your state and household size from Step 1, you pass the means test and can proceed with Chapter 7 bankruptcy. However, if it’s above the threshold, you may need to consider Chapter 13 bankruptcy instead.
Special circumstances, such as being a disabled veteran or having primarily non-consumer debt, can exempt you from the means test. These exemptions are crucial for individuals who might otherwise struggle to meet the standard criteria.
Common Pitfalls & Mistakes While Filing for Chapter 7 Bankruptcy
One of the most common pitfalls in the means test process is providing incomplete or inaccurate information. This can lead to your bankruptcy case being denied or dismissed. It’s crucial to gather all necessary financial documents, including pay stubs, tax returns, and bank statements, before starting the means test. Double-checking your entries for accuracy can prevent costly mistakes. For instance, failing to include all sources of income or misreporting expenses can skew the results, potentially disqualifying you from Chapter 7 bankruptcy.
Another critical aspect is ensuring that all information remains current throughout the bankruptcy process. Financial situations can change rapidly, and failing to update your information can lead to complications. For example, if you receive a bonus or incur additional medical expenses, these changes should be reflected in your means test calculation.
Misunderstanding Allowable Deductions
Misunderstanding allowable deductions is another common mistake that can impact your means test results. Many individuals assume that all their expenses are deductible, leading to inaccurate calculations. It’s essential to differentiate between allowable and non-allowable expenses. For instance, luxury items or non-essential services are not deductible. Understanding the guidelines provided by the U.S. Trustee Program can help you accurately list your expenses.
Common misconceptions also arise regarding specific deductions like healthcare costs or transportation expenses. For example, while you can deduct necessary medical expenses, elective procedures are not included. Similarly, transportation expenses should be reasonable and necessary for daily commuting or essential travel. Misunderstanding these nuances can lead to errors in your means test calculation.
Consequences of Failing the Means Test
Failing the means test doesn’t mean the end of your bankruptcy options. If your disposable income is too high for Chapter 7, you still have Chapter 13 as an option. Chapter 13 consolidates your debts into a 3- to 5-year repayment plan. You’re allowed to keep your assets while making manageable payments based on your income and expenses. Although it requires a longer commitment, Chapter 13 bankruptcy is a viable path to debt freedom.
Another option is to refile for Chapter 7 when circumstances change. For example, if you experience a significant drop in income or ballooning (allowable) expenses, you could become eligible for Chapter 7 at a later date. A bankruptcy attorney can help weigh these alternatives and determine the best course of action for your situation.
More Reasons to Consult a Bankruptcy Attorney in Washington, DC
Navigating the means test and the broader bankruptcy process can be complex, making it essential to consult a bankruptcy attorney. An experienced attorney can provide advice tailored to your financial situation, ensuring you understand your options and obligations. They can ensure you complete the means test forms accurately, reducing the risk of time-consuming errors. In Washington, DC, The Belmont Firm provides quality counsel for bankruptcy cases, offering proven solutions to help achieve freedom from debt.
Our Washington, DC bankruptcy attorneys represent clients in court, shield them from creditors, and clear their legal hurdles throughout the bankruptcy process. Our guidance is critical for navigating bankruptcy smoothly, providing peace of mind, and bringing you closer to financial freedom.
Call (202) 875-8445 for a Free Bankruptcy Consultation
If you need to know if you’re eligible for Chapter 7 bankruptcy, call The Belmont Firm. Our bankruptcy attorneys in Washington, DC can discuss your legal and financial options in a free consultation. Call (202) 875-8445 today to take the first step towards a fresh financial start.