The Resource Limits for Chapter 7 Bankruptcy

by Beverly Bird
The means test determines your eligibility for chapter 7.

The means test determines your eligibility for chapter 7.

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The United States Bankruptcy Code doesn't put an exact statutory limit on how much income you can earn before you're disqualified from filing for chapter 7. However, this simply means it's not a one-size-fits-all requirement. Resource limits exist, but they depend on your family size, the earnings of others in your state, as well as what exemptions are available to you.

Chapter 7 versus Chapter 13

If your income and resources don't qualify for chapter 7, this doesn't stop you from filing for bankruptcy at all. It means you may file for chapter 13 protection instead. In a chapter 7, the trustee sells or liquidates the debtor's property and uses the proceeds to pay as much of his debt as possible. In a chapter 13, the debtor gives the trustee his extra income each month after paying necessary living expenses -- and the trustee uses this money to pay his debts instead of liquidating the debtor's property.

Figuring Your Income

Eligibility for chapter 7 begins with your monthly income. This is not necessarily what you earned the month before you file. The bankruptcy code averages out your income over the previous six months. For example, if you earned $3,000 in the month before you file because you got a new job, but you were unemployed for the five months before that and had no income or unemployment benefits, your monthly income is averaged at $500 a month, or $3,000 divided by six.

Your State's Median Income

The next step is to figure out if your monthly income is less or more than the median income for a family of your size in the state in which you live. If you're married with two children, you would compare your monthly income to the median income in your state for a family of four. If your income is less than this figure, you can typically file for chapter 7. If it's more, you must make further calculations, called the means test.

The Means Test

The means test involves whittling away at your average monthly income by deducting your necessary living expenses. It's effectively a second chance at qualifying for chapter 7. Deductible expenses include housing, transportation, child care, secured debt payments, healthcare costs, child support, alimony, and some life insurance premiums. You can deduct for clothing, food and standard living expenses. However, the bankruptcy code uses Internal Revenue Service limits for expenses based on what's reasonable for your particular area. If the average mortgage in your area is $1,500, this is the most you can deduct, absent extreme circumstances, such as that the additional payment amount is due to amenities necessary to accommodate a medical condition. After you complete the means test, if you've got less than $100 in income left over, you can file for chapter 7. If the number falls between $100 and $166, the court will decide which chapter of bankruptcy you must file. If it's more than $166, you're limited to chapter 13.

Using Exemptions

Your income isn't the only resource that can affect chapter 7 bankruptcy. The value of your property can have an impact as well, not on whether you qualify, but on whether you can keep the property. However, you can use exemptions to safeguard various items from liquidation by the trustee. Each state has its own list of exemptions, and the federal government has a list as well. In some states, you can choose between them, while in others, you must use the state's list. If the available exemption for your home is $25,000, and if you have $25,000 in equity after accounting for the mortgage lien, the property is safe. If you have $50,000 in equity, the trustee can force the property's sale, paying off the mortgage and giving $25,000 of the equity to your creditors.