Income Qualifications for Chapter 7 Bankruptcy
There are several types of bankruptcy. Chapter 7 for an individual is the most drastic. In this type of bankruptcy, all of your bills can be erased, leaving you with a clean slate. In return, all but exempt property, deemed as necessary to you by the court, will be sold to partially satisfy debtors. Exempt property is your housing and your transportation. There is a catch--you must qualify for the Chapter 7 bankruptcy.
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History
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Under old bankruptcy laws, the judge had the authority to decide if the debtor had enough disposable income to at least pay off some of his debts under Chapter 13 bankruptcy. If so, he would dismiss the Chapter 7 bankruptcy petition, and convert it to Chapter 13. There were no set rules. It depended on the individual's situation and the judge's attitude.
Features of the New Bankruptcy Law
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Under the new bankruptcy law, there are strict rules about who can qualify for Chapter 7. Disabled veterans whose debts were incurred during active duty and people whose debts were incurred mainly from the operation of a business are almost always eligible. Others must pass certain requirements before their cases will be allowed to proceed as Chapter 7 bankruptcies.
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Starting Off
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The first step in deciding if you qualify for Chapter 7 bankruptcy is determining your income level. You must average your income for the last six months, and this will be compared to the median income of families of the same size in your state. If your income falls below or equal to the median income, then you qualify for Chapter 7. If your income is above the median, then you have to pass the "means test."
Features of the Means Test
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The means test was designed to keep people with higher incomes from filing Chapter 7, and only filers with mainly personal debt need to take it. Even so, if you have a high income and a lot of expenses, like an exorbitant mortgage payment, you may still qualify. The means test deducts specific monthly expenses from your current monthly income to arrive at disposable income or income that can be used to reduce debt. Naturally, the higher your disposable income, the less likely you will be to qualify for Chapter 7. If you want to find out if you pass the means test, there are several online sites with calculators to give you some idea.
Considerations
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Even if you pass the means test, there are other things to consider. Bankruptcy may not be the best way out of your particular situation. You must consider the hit your credit rating will take. You must also consider that you almost definitely will lose property. Also, before the actual filing, you must have taken a consumer credit counseling course within the prior six months. By doing this, you may discover a way out you had not thought about.
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