Maximum Allowable Income When Filing Chapter 7 Bankruptcy
Chapter 7 bankruptcy is known as liquidation. It forces the debtor to sell all his nonexempt assets to pay his outstanding debts. Chapter 7 is beneficial for those with few assets, because most debts that can't be paid after liquidation are permanently forgiven. However, a change in laws has limited the maximum allowable income for filing Chapter 7 bankruptcy.
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History
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Before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, there was no maximum allowable income for filing Chapter 7 bankruptcy. Because creditors believed the debt-forgiveness provisions were being abused, the law created a means test that limits access to Chapter 7.
Identification
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The maximum allowable income when filing Chapter 7 bankruptcy varies by state. Those who earn at or below the state median income as reported by the U.S. Census Bureau (see Resources section) qualify for Chapter 7.
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Means Test
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To see if you meet the means test, average your monthly income for the three months immediately before you filed, then multiply that result by 12. If this average is equal to or less than your state's allowed median annual income, you pass the means test.
The allowed median annual income ranges from $20,715 for a single earner in Puerto Rico to $103,719 for a family of four in Maryland.
Another Way to Qualify
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If you fail the initial means test, you have one other chance to qualify for Chapter 7 bankruptcy. If your average monthly disposable income multiplied by 60 (representing five years of monthly payments) is less than your total outstanding debt, you can file Chapter 7.
Disposable Income
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When figuring your average monthly disposable income for means test purposes, you're allowed certain standard deductions based on national and local standards (see Resources section). The applicable deductions are subtracted from your gross income to yield your disposable income.
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