Do I Qualify for Chapter 7 Bankruptcy? And What Are My Options If I Don’t?
A Chapter 7 bankruptcy allows you to discharge most, if not all, of your outstanding unsecured debts, such as credit card bills. However, federal law requires you to satisfy a “means test” before you can actually file a Chapter 7 petition. The basic idea behind the means test is that higher wage earners–i.e., people who have the financial ability to repay their creditors over time–should not be permitted to simply wipe out their debts.
At the same time, the means test does not actually require you to be unemployed or have no income whatsoever. The means test simply establishes a maximum income threshold based on where you live and the number of people in your household. The test itself looks at your “current monthly income,” which is defined as your average income during the six-month period before you plan to file for Chapter 7 bankruptcy.
Understanding the Bankruptcy “Means Test”
The first step in the Chapter 7 means test is to take your gross income from all sources over the past 6 months and divide it by 6. Gross income includes your salary, wages, and self-employment income, as well as any interest or pensions you may receive. Some government benefits, including Social Security disability insurance and the recent COVID-19 stimulus payments, are not considered gross income and do not have to be included.
Once you have your six-month average, you must then multiply that number by 12 and compare that figure to the annual median income for Iowa. If your income is below the annual median, you “pass” the means test and can file for Chapter 7 bankruptcy. It is important to note, however, that the median income increases depending on the number of people who live in your household. For bankruptcy petitions filed on or after May 1, 2020, the Iowa annual median income thresholds are as follows:
- For 1-person households, $51,579
- For 2-person households, $69,127
- For 3-person households, $78,930
- For 4-person households, $95,581
- For each additional person beyond 4, add $9,000
Even if your household income exceeds the applicable limit, you may still qualify for Chapter 7 bankruptcy based on your “disposable income.” This refers to your gross income less certain allowed deductions, including payroll deductions for income tax, food and clothing, and housing. For some of these expenses, your deduction is determined by an IRS-approved formula rather than what you may have actually spent. Your final disposable income number is then compared against a threshold to see if you have enough money to support a repayment plan. If you do not, you have passed the means test and can file for Chapter 7.
A Southeast Iowa Chapter 7 Bankruptcy Lawyer Can Help
“Failing” the means test does not mean you cannot seek bankruptcy protection. It simply means you will need to file a Chapter 13 petition instead of Chapter 7. A Chapter 13 bankruptcy requires you to file a plan with the court to repay your creditors over time, usually 5 years. Again, this assumes you have sufficient disposable income to meet the plan’s requirements.
We understand that filing for bankruptcy is a difficult and often confusing process. That is why we are here to help. The Southeast Iowa bankruptcy attorneys at the Noyes Law Office are here to provide you with compassionate and understanding representation in any Chapter 7 or Chapter 13 matter. Contact us today to schedule a free consultation.