How Do I Qualify To File For Chapter 7 Bankruptcy Relief?
To qualify for Chapter 7 bankruptcy, there are a couple requirements you will have to meet:
- First, you have to wait to file Chapter 7 until at least 8 years after filing a previous Chapter 7, and at least 6 years after filing a previous Chapter 13.
- Second, you must pass the “means test,” which is a two-part analysis comparing your household income to the median income for your household size.
- Third, your real world budget must be balanced.
WHAT IS THE MEANS TEST?
The means test is a two-prong analysis of your household income. The first prong of the test compares the last 6 full calendar months of all of your household’s gross income with the median income for your household size in Minnesota. The retrospective nature of the means test can penalize people that have worked unreasonable overtime hours or have taken an unsustainable part time job to try to avoid the bankruptcy process.
The median income figures are regularly updated. As of late 2020, the current median annual household incomes for Minnesota are as follows:
Family of 1 – $61,811
Family of 2 – $81,478
Family of 3 – $100,430
Family of 4 – $118,646
Family of 5 – $127,646
Family of 6 – $136,646
The means test counts all of your income received over the 6 months prior to the filing of the bankruptcy case. Pension, child support, unemployment compensation, and worker’s compensation payments or other private disability payments all count as income. It also includes any income received to help pay for living expenses. This is typically a significant other or renter in the home. About the only sources of income that do not count in the means test are Social Security Income, Social Security Disability Income, and VA Disability Income.
Withdrawals from IRAs, 401ks or proceeds from the sale of property you own do not count as income (though these transactions should be identified in other parts of the bankruptcy petition). Those are benefits from income you have already earned.
BELOW MEDIAN INCOME
If it is determined that your income is below the median income on the means test, then you pass the means test. The next step is to look at your budget.
ABOVE MEDIAN INCOME
If you are over the median income, you may still qualify for Chapter 7, but to do so, you must complete the second prong of the means test, known as the “long-form” or “long” means test. The long means test deducts certain expenses (both IRS standard numbers and your actual household expenses) from your gross monthly income.
Many of the deductions from income used in the means test are not your real monthly expenses but local and national standards used by the IRS when they complete a budget for you. These include standard allowed expenses for food and clothing, health care, housing, and vehicle expenses.
The means test also uses some real deductions taken from your gross monthly income, including: payroll withholding taxes, mandatory pay deductions (like union dues), term life insurance monthly premiums you paid, child support and spousal maintenance, child care expenses, health/disability insurance premiums, HSA account contributions, verifiable charitable contributions made on a regular basis, limited educational expenses for a child, and secured debt payments over the amount allowed in the IRS standards, and a few other miscellaneous deductions.
All allowed deductions are subtracted from your average gross monthly income to determine your Disposable Monthly Income (DMI). If your DMI is under about $128, then you would qualify to file for Chapter 7 bankruptcy.
Ultimately, the long means test is a complex formula and process. At Prescott Pearson & Tande, PA, we have the experience to determine whether you pass the long means test and will qualify to file a Chapter 7.
FAILING THE MEANS TEST
If your income is above the median income and you fail the long means test, do not despair – you still have an option: Chapter 13. A Chapter 13 case can be filed even if you do not qualify to file a Chapter 7. If you are over the median income, your Chapter 13 must be for a 60-month time period.
YOUR REAL BUDGET: SCHEDULE I & J
The third qualification for Chapter 7 bankruptcy requires that your real-world post-bankruptcy budget must be neutral. This is done on Schedule I and J of the bankruptcy petition. While the Means Test is a backward-looking analysis of your past 6 months of income, your budget on Schedules I and J is a forward-looking analysis of what your budget will look like after your bankruptcy petition is filed and you are no longer obligated to pay most or all of your creditors.
INCOME: SCHEDULE I
Your real income budget looks forward and uses your anticipated income including any foreseeable changes. The means test may have inflated the amount of your gross income because of the substantial overtime you worked in the past six months to avoid bankruptcy, or because it includes income from a second job that you only worked to try to avoid bankruptcy but that is not realistic for you to maintain. If these sources of additional income are stopped then they will not be included in the budget.
EXPENSES: SCHEDULE J
Your real living expenses budget looks forward and uses your anticipated expenses including foreseeable changes. Many of my clients have decreased their budget to unreasonable levels, again trying to avoid bankruptcy, but it is unrealistic to maintain that lifestyle. Living with parents, not maintaining vehicles, going without health insurance, or not eating properly can only work for so long. Your real expense budget uses more reasonable and sustainable expenses.
WHO REVIEWS WHETHER I QUALIFY TO FILE FOR CHAPTER 7?
First and foremost, you and your attorney will review whether you qualify to file for Chapter 7. Prescott Pearson & Tande, PA has years of experience in preparing means tests and budgets, and will know the ins and outs of whether and how you qualify for Chapter 7.
After your Chapter 7 bankruptcy is filed, your case may be reviewed by the United States Trustee’s Office to determine if you can remain in a Chapter 7 bankruptcy case, or if you should be in a Chapter 13 instead. They review the means test to verify that the numbers used are correct and they review the real budget to verify that the income stated is correct and the expenses claimed are not excessive. If your income and expenses are reasonable for your family size and you cannot afford to make a payment to your creditors after paying all of your normal living expenses, then your Chapter 7 bankruptcy case can continue to completion.