Do I Qualify for Bankruptcy?

U.S. Attorneys Helping Clients Understand the Means Test for Chapter 7 and Chapter 13 Bankruptcies

When you are struggling with overwhelming debt, it can seem impossible to make ongoing payments while also covering all of your living expenses. You may be considering bankruptcy, which can help you either eliminate your debts or consolidate them into an affordable payment plan. However, you may be unsure about what type of bankruptcy you qualify for based on the amount of income you earn and the types of debts you have. As you prepare for the bankruptcy process, you will want to be sure to understand how the bankruptcy means test will be used in your case.

Qualifying for Chapter 7 or Chapter 13 Bankruptcy

For many debtors, Chapter 7 is the preferred type of bankruptcy, since it will allow them to discharge or eliminate their debts. While some of a debtor's assets may be liquidated during a Chapter 7 bankruptcy, there are exemptions from liquidation, and in many cases, a debtor will not be required to turn over any assets or property. However, not everyone is eligible to use this type of bankruptcy.

To determine whether you qualify for Chapter 7, a "means test" is used to find out whether you have the financial means to repay some of your debts. The means test has two parts. First, your income will be compared with the median income for a household of the same size in your state, and if you are below the median income, you will qualify for Chapter 7.

If your income is higher than the median income in your state, the means test will then look at your disposable income to determine whether you have the capability to repay a significant portion of your unsecured debts. Your disposable income is determined by taking your average monthly income and subtracting all applicable expenses, which may include:

• Housing and utilities
• Transportation expenses, including payments on auto loans or leases, as well as vehicle operating expenses and public transportation costs
• Taxes owed at the federal, state, or local level
• Life insurance premiums
• Court-ordered payments such as child support or spousal support
• Childcare expenses, including daycare, babysitting, or nannies
• Health insurance and other healthcare costs, including disability insurance, health savings account expenses, and out-of-pocket expenses necessary for the health and welfare of your dependents
• Educational expenses for your minor children
• Ongoing charitable donations
• Involuntary payroll deductions, such as union dues or retirement and pension contributions
• Payments made toward secured debts, including home mortgages or debts secured by a primary residence or other property that is necessary for the support of your dependents

If your monthly disposable income will allow you to pay off at least 25% of your unsecured debts over five years, you will not qualify for Chapter 7 bankruptcy. Instead, you will need to pursue Chapter 13 bankruptcy, which will consolidate your unsecured debts into a repayment plan that will last from three to five years, after which any remaining unsecured debts will be discharged.

Regardless of whether you will be pursuing Chapter 7 or Chapter 13 bankruptcy, you will be required to take credit counseling. Other issues that may affect your eligibility for bankruptcy include the amount of time you have lived in your state, whether you filed tax returns during the previous four years, and whether you have filed for bankruptcy in the past. Typically, you will be unable to file for bankruptcy if you completed a Chapter 7 bankruptcy within the previous eight years or a Chapter 13 bankruptcy within the previous six years.

Contact a United States Bankruptcy Lawyer

If you are considering bankruptcy, you will need to make sure all of your financial information is properly prepared to show that you qualify for the type of debt relief you are seeking. A skilled bankruptcy attorney can help you determine your best options, and they can assist in preparing and filing paperwork and addressing any concerns that may arise during the bankruptcy process. With a qualified legal advocate on your side, you can address your debts and move on to a better and more financially secure situation.