Can You File Bankruptcy Owing Less Than You Make?

by Tom Streissguth
Federal bankruptcy law sets out a means test for Chapter 7 filers

Federal bankruptcy law sets out a means test for Chapter 7 filers

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If you're facing serious financial difficulties, you may consider filing for bankruptcy protection under federal law. The bankruptcy process is designed to give you a fresh financial start, discharging certain debts while allowing you to keep some "exempt" property. However, if you owe less than you earn, a new bankruptcy law passed in 2005 will make it difficult for you to qualify for a Chapter 7 bankruptcy, which involves liquidation of your assets and discharge of your debts. Instead, you may have to file for Chapter 13 bankruptcy, which requires partial or full repayment to your creditors.

Income Guidelines

Congress overhauled the federal bankruptcy laws in 2005. The law now imposes income guidelines and a "means test" on those filing for Chapter 7 bankruptcy. The first step in this process is to figure your current monthly income. In order to qualify, this number must be at or below the median income for a family of the same size in your state. If your income is below the median, you may file for Chapter 7 bankruptcy. If the number is above the median, you must pass a means test to qualify for Chapter 7 bankruptcy.

Means Test

The federal bankruptcy statute 11 U.S.C. §707(b) governs the bankruptcy means test. For the means test, you must calculate your recent disposable monthly income. This is the amount you have earned from all eligible sources over the past six months, divided by six. From this number you may subtract allowable living expenses for food, clothing, housekeeping, personal care products and other costs. If the resulting number is zero or negative, you pass the means test. If not, you multiply the number by 60, representing your disposable income over the next five years.

The Chapter 13 Option

If the result of the calculation is less than $7,025, you still pass. You also pass if the number is less than 25 percent of your unsecured debts, but fail if the number, multiplied by 60, is greater than $11,725 or 25 percent of your unsecured debts, as of 2013. For example, if your unsecured debts amount to $40,000, but your five-year disposable income is $9,000, you pass. If that income rises to $12,000, you fail the means test -- you earn too much and your disposable income is too high as a percentage of your debt. You still have the option to file for Chapter 13 bankruptcy, in which you set up a repayment schedule that satisfies all or a percentage of eligible debts while allowing you to keep your property.

Chapter 13 Eligibility

The requirements for Chapter 13 bankruptcy are found in 11 U.S.C. §109(e). The law sets out guidelines for debt levels, restricting Chapter 13 to those with unsecured debts less than $360,475 and secured debts of less than $1,081,400. These numbers are accurate as of 2013 and are regularly revised to match consumer price inflation. For purposes of a Chapter 13 bankruptcy, the law does not demand a calculation of income as a percentage of debt or set absolute limits on the income level.

Other Requirements

As a general rule of thumb and by the guidelines given above, anyone owing less than they earn will probably not be able to file for Chapter 7 bankruptcy; the filer's disposable income over five years has to be less than a quarter of the outstanding unsecured debt. If you don't pass the means test, you may still qualify for a Chapter 13 bankruptcy, depending on your total debt levels. But for both Chapter 7 and Chapter 13, the bankruptcy law sets out other requirements for petitioners, including attending and completing an approved credit counseling course.