Chapter 7 bankruptcy is a great option for many individuals facing large debt burdens, especially for credit cards, medical bills, and repossessed cars. Chapter 7 bankruptcy can wipe out these debts, and any related lawsuits. It helps individuals get back on their feet and on with their lives. Chapter 7 bankruptcy is a one-time filing, and unlike Chapter 13 bankruptcy, does not require any money to be repaid to unsecured creditors.
Not all debtors, however, qualify for a Chapter 7 bankruptcy. This and the next two posts will discuss the issues which determine whether an individual qualifies for a Chapter 7 bankruptcy. I go through these questions and issues any time I meet with a new client who is considering bankruptcy. Most of these issues deal with income, property, and debts, and sometimes with timing. The initial issue I always discuss first is household income. This is the most frequent determinate of whether or not an individual qualifies for Chapter 7 bankruptcy.
Bankruptcy petition filers must, in most cases, complete a financial determination called the "means test". This is a six-month look-back of all household income. It includes non-filing spouses, and it includes a very broad definition of "income", with nearly all types of income besides Social Security income counting. This includes bonuses, unemployment compensation, one-time windfalls, retirement accounts, and even child support. It includes income that is both taxable and exempt from taxation.
This broad definition often frustrates potential filers. "Why does my spouse's income count, even if they will not be filing?" "Why is a one-time bonus considered income?" I can sympathize with these questions, but the reality is they count because Congress says they do. We have to deal with the law as it is, not as we wish it would be. However, there are a few things that can help push towards Chapter 7.
First, the amount you are allowed to earn increases with household size, which includes spouses and non-earning children. A household of one can gross (earnings before taxes) about $25,500 in the six months before filing. The allowable amount increases with each household member. For instance, a household of four can earn roughly $45,000 for the same look-back period. The more members of your family, the more you can earn and still file Chapter 7 bankruptcy. The means test is described in greater detail elsewhere on this blog, but for now it suffices to say that recent income is the initial factor in determining Chapter 7 eligibility.
What if you are above this threshold? There are a couple options. First, you can wait to file. If your income will be decreasing in the next several months, or you had a large one-time windfall in the last six months, it may be worth waiting in order to fall below the allowable income limit. Planning of this type is an important part of my job. Second, it is possible to file a Chapter 13 bankruptcy if your income is too great for a Chapter 7 bankruptcy. Chapter 13 bankruptcy is discussed in detail elsewhere on this website and in this blog. While Chapter 13 does require at least some repayment to creditors, it eliminates interest, freezes the amount owed, and stops any lawsuits. So, it is often a useful tool.
So, the first thing I will need to determine if you qualify for Chapter 7 bankruptcy is six months of pay stubs (for you and your spouse) or bank statements if you do not receive pay stubs. If you are near the threshold, having this information can make the initial consultation a lot more useful.
Contact us if you are considering Chapter 7 bankruptcy, but are not sure if your income disqualifies you. I will be happy to review your earnings and advise you on the best plan going forward.
In my next post (Part 2), I will discuss the importance of your mortgage in filing Chapter 7 bankruptcy.