Chapter 7 Median Income Limits

Median family income determines eligibility for Chapter 7 bankruptcy.

Any person wishing to file for Chapter 7 bankruptcy must meet the income requirements. The Bankruptcy Abuse Prevention and Consumer Protection Act implemented a new provision of bankruptcy law in 2005, and that provision is called the means test. The means test uses a debtor's family income to determine if a debtor can file for Chapter 7 bankruptcy or if a person would be presumed to be abusing the bankruptcy system by filing for Chapter 7.

Median Income

Before a debtor files his bankruptcy petition, he must take the means test to determine which chapter of bankruptcy he can file. The debtor takes the means test by comparing his family income to the median family income for a family of the same size in his state of residence. If the debtor's family income is less than the median income for his state of residence, there is no presumption of abuse. If there is no presumption of abuse, the debtor can file for Chapter 7 bankruptcy.

Presumption of Abuse

If the debtor's family income is slightly above her state median income, she will not be automatically banned from filing for Chapter 7 bankruptcy. If the debtor's family income is more than the median income for her state of residence, the debtor must continue with the means test to determine if there is a presumption of abuse. The debtor calculates her monthly disposable income next by deducting her allowed monthly expenses from her monthly income.

Disposable Income

If the debtor's monthly disposable income is less than $100, there is no presumption of abuse. If the debtor's monthly disposable income is more than $100, but that amount would not cover at least 25 percent of the debtor's debts over the next five years, the debtor can file for Chapter 7 bankruptcy. If the debtor's monthly disposable income is more than $100, and that amount would cover 25 percent of the debtor's debts over the next five years, there is a presumption of abuse.

Debt Repayment Plan

When taking the means test a presumption of abuse means that a debtor has enough income to fund a Chapter 13 bankruptcy debt repayment plan. In a Chapter 13 debt repayment plan, a debtor uses all of his monthly disposable income to repay his debts over the applicable commitment period of three or five years. The debtor pays his disposable income to a bankruptcy trustee each month, and the trustee distributes payment to the debtor's creditors.

References

• Southern Illinois University Law Journal: Living with the Means Test
• U.S. Courts: Chapter 7