pageTracker._trackPageview(); } catch(err) {}

How Much Can I Make and Still File Chapter 7 Bankruptcy

How much can I make and still file Bankruptcy

            The answer is  - it depends on the Means Test.  The Bankruptcy Abuse Reform Act (BARF) was regurgitated by Congress in 2005 in an effort to restrict access to Chapter 7 bankruptcy relief.  Its main ingredient was the Means Test.  The basic theory behind the Means Test is that folks who earn more than median income should not be able to simply walk away from their debts in Chapter 7, if they can pay a significant amount under a Chapter 13 repayment plan

            The Means Test is made up of two parts.  The first part focuses on income, and the second looks at whether there are adequate funds to pay the creditors.  If you pass the first, you don’t even consider the second part’s requirements.  The first part only considers your gross household income.  If your income for the past six months multiplied by two is less than the median income for your state, you pass.  For instance, if you live in Kansas in a household of 4, and you and your spouse’s gross income is less than $74,853 a year, you pass and can file Chapter 7. [ For Missouri the figure for the same facts is $70,587 ].    

            If the gross income exceeds the state median, then we consider the second part of the test.   For this part of the test, you are allowed to make certain deductions.  The primary source for these is our friendly IRS.  For years, they allowed certain standard expenses to determine how much a delinquent taxpayer would be forced to come up with to keep the feds off their back, and out of their pocketbook.  Congress, in enacting BARF, incorporated the amounts specified in these standards.  A family of four can deduct $1,450.00, for Living Expenses (This encompasses what IRS feels is monthly spent for food, housekeeping, apparel, personal care, and misc.).  A monthly medical deduction of $60.00 per household member under age 65 is allowed, and $144 for those 66 years of age and older.   Further, a monthly mortgage/rent deduction is allowed.  This figure is specific to the county you live in, and household size.  If you live in Johnson County, Kansas, that figure for a family of four is $1,674, and you can take an additional deduction of $596 for non-mortgage/rent related expenses.  You can also take a deduction for car ownership of $212.  If that car is older than 7 years, then take $200 more a month.  If you are making a car payment, then you can deduct the higher figure – your monthly payment or $517.  These are the standard deductions.  But wait, there are a few more that may be available:  Mandatory payroll deductions for taxes, social security, and medicare; health insurance; life insurance; disability insurance; court-ordered payment such as garnishments, and child support; child care expense; health care expense above the standard amount allowed above; education expenses up to $125 per child; regular charitable expense; and expenses required by your employment such as union dues, uniforms, ect.   Lastly, there are also deductions for certain types of debt payments:  Debts secured by collateral that will come due in the future, past due amounts secured by your home or car, and payment past due on ‘priority debts’.   Lets explore these a bit further.  If you are behind on any debt secured by your home, car or other essential item, you are allowed an additional deduction equal to the amount necessary to satisfy the arrearage over 60 months.  For example, if you are $1,500 behind on your mortgage, you can deduct an additional $25 ($1,500/60) per month in addition to your regular payment.  Looking at the category of payment on priority debt requires a bit of background.  The most common priority debts are past due child support, income taxes less than three years old, measured from the date the tax return was due [if older that debt may well be dischargeable], and liabilities for personal injuries caused by drunken driving or boating.  You are entitled to deduct the amount necessary to satisfy these priority debts over 60 months.  So, if owe taxes of $6,000, you are entitled an expense deduction of $100 ($6,000/60).

            We are now at the part where we determine if you pass the second part of the test.  All deductions are subtracted from your monthly gross income.  If that resulting figure is greater than 0, then it is multiplied by 60.   Should the product be less than $7,025, you pass.  If the product is greater than $11,725, you can not file Chapter 7 bankruptcy.  If the product is between those two figures, we go on to one further test.  If that number is less than 25% of your unsecured non-priority debt, you can go ahead and file Chapter 7, but if not then we are looking at Chapter 13.

            I have tried to be as clear as I can, but the formula itself is a mix of theory and legislative compromises.  It is much easier to apply the test to individual cases.  Also I have not gone into all the possible factors that may affect the means test, such as how income is calculated when one spouse does not file bankruptcy, or how ‘household’ is defined.  I hope this brief explanation of the Means Test helps.