There is a common misconception that few people qualify for Chapter 7 Bankruptcy since the bankruptcy reforms imposed by the Bankruptcy Abuse Prevention & Consumer Protection Act of 2005. While the legislation did create a financial means test that limits the eligibility of some who would previously have qualified for a Chapter 7 discharge, there is no truth to the premise that people need to be close to the poverty level to qualify for Chapter 7. Many people with six-figure incomes can satisfy the means test and obtain Chapter 7 bankruptcy relief.
The means test is a two-part evaluation that does not analyze a debtor’s income in isolation but considers income in relation to one’s secured and unsecured debt obligations. The first part of the evaluation involves comparing the income of the debtor to the median income in Florida. If the debtor’s income is lower than the state median income, the debtor qualifies for Chapter 7 Bankruptcy without further evaluation.
The median income is based on the size of the family. This threshold for Florida as of May 1, 2019, ranged from approximately $49,172 for a family of one to $78,833 for a family of four. If you are filing for bankruptcy in another state, the median state income in that state will be used for this stage of the evaluation. The median income figure for Florida goes up every year.
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This evaluation includes consideration of gross income (i.e. pre-tax income) for all members of a household regardless of who is filing bankruptcy. The debtor’s median income is determined by adding the gross income for the six months prior to filing, doubling the amount and dividing by twelve.
Even if your income exceeds the median income based on the number of people in your family, you may still qualify for Chapter 7 if you do not have enough disposable income to make a significant monthly payment to your credit card debts and other forms of standard unsecured debts. A debtor’s disposable income is evaluated after allowing for a number of deductions from your gross income, which include the following:
- Standard mandatory payroll deductions
- Secured obligations (e.g. mortgage, financed vehicles)
- Priority unsecured debts (e.g. child support, alimony, certain taxes, etc.)
- Necessary living expenses in amounts allowable under IRS regulations
- Certain extraordinary expenses that occur regularly
- Certain expenses based on actual amounts paid
If there is a significant amount of disposable income left over after deducting these amounts, you will be required to file Chapter 13. Debtors that do not have enough income remaining after these amounts have been deducted qualify for Chapter 7 under the means test. If you do not qualify under the means test, you will be forced to file Chapter 13, which is less advantageous because you will not simply be relieved of your obligation to pay most unsecured debts like medical bills, credit cards, loans without security interests and other forms of non-priority unsecured obligations. The attorneys at Ayo and Iken strongly recommend Chapter 7 cases because they are incredibly more beneficial to our clients. Debtors who do not qualify for Chapter 7 under the means test must make monthly payments toward a payment plan over a 3 or 5-year period. Their discharge will be received only if they successfully complete their payment plan so they will have to wait years for their discharge. Those forced into Chapter 13 also will be obligated to repay some or all of the debtor’s unsecured debts. Our experienced Florida bankruptcy attorneys offer a free consultation so we can evaluate your situation and advise you about your eligibility under the Chapter 7 means test.