Qualifying for a Chapter 7 Bankruptcy

Before 2005, debtors could qualify for a chapter 7 bankruptcy if they could establish on paper that their actual monthly expenses exceeded their monthly income. This was changed in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act, which enacted an objective "means test" to determine chapter 7 eligibility. The problem was that too many chapter 7 filings were presumed abusive because debtors were inflating their actual expenses to yield negative disposable income, or were living too extravagantly while seeking to discharge their debt obligations.

Nowadays, if a debtor's income is below the applicable median family income for the state in which he lives (which varies depending on the number of household members), he qualifies for a chapter 7 (keep in mind that a debtor who is married but filing individually must include his or her spouse's income in the equation). If the debtor's income is above the applicable median family income, a chapter 7 filing is presumed "abusive", UNLESS the debtor can pass the means test. The means test allows debtors to deduct reasonable living expenses based on local or national standards, and deduct other actual expenses, e.g., a mortgage payment, a car payment, payroll taxes and involuntary deductions, or child or spousal support payments, from their gross monthly income. In other words, debtors must now comply with some objective living standards as opposed to their actual living expenses.  Data on median family income and objective expense allowances can be found here.

Completing the means test can be very challenging. If you are concerned with your ability to qualify for a chapter 7, please contact an attorney well-versed in the field.