Federal law allows an individual to choose between two bankruptcy options: Chapter 13, which organizes debt into a payment plan, and Chapter 7, which erases most consumer debt. Since Chapter 7 eliminates debt, there are strict income and debt limitations imposed by law to ensure that only people in the greatest need are afforded this type of protection.
Median Income Threshold Limits
To qualify for Chapter 7 protection, a debtor's income must fall below the median income for her state. This income comparison depends on several factors, including the number of household members and the state where the debtor lives. As of 2012, a person living alone in Illinois is eligible so long as her income does not exceed $46,983. The income cap increases to $59,794 for two-person households, $68,865 for three-person households and $81,570 for households with four people. If the household includes a spouse whose earnings are used to pay expenses, his income is counted as household income.
If a debtor's income is greater than the median income in Illinois, a second step in this "means testing" is needed to determine whether she qualifies for Chapter 7 bankruptcy protection. This is a complicated process requiring the debtor to calculate her gross household income, then subtract certain deductions to determine her discretionary spending. If the discretionary spending is greater than an amount set by law, the debtor is not qualified for Chapter 7 bankruptcy protection.
In addition to earning too much income, a debtor may be disqualified from Chapter 7 bankruptcy protection in other ways. A person is disqualified if she filed for bankruptcy in the past six months and her case was dismissed because she failed to appear for a court hearing, did not obey a court order or voluntarily dismissed the petition to protect property from a creditor. The debtor is also disqualified from Chapter 7 bankruptcy if she had debt discharged under Chapter 7 or Chapter 11 bankruptcy within the past eight years, or under Chapter 12 or Chapter 13 bankruptcy in the past six years.
In addition, a debtor must also undergo credit counseling within six months prior to the filing of the petition. The petitioner must also pay filing fees to the Bankruptcy Court in addition to any other legal fees.
References & Resources
- U.S. Courts: Chapter 7: Liquidation Under the Bankruptcy Code
- Illinois Attorney General: Bankruptcy
- National Bankruptcy Forum: Accounting for a Non-filing Spouse’s Income in a Chapter 7 Bankruptcy
- U.S. Bankruptcy Court, Northern District of Illinois: Schedule of Fees – 28 U.S.C. §1930
- U.S. Department of Justice: U.S. Trustee Program – Means Testing
- U.S. Bankruptcy Court, Northern District of Illinois
- Bankruptcy Action: Illinois Bankruptcy Exemptions
- U.S. Department of Justice: Bankruptcy by the Numbers
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