What Are Living Costs in Chapter 7?

By John Green

Not everyone qualifies for a complete discharge of indebtedness under Chapter 7 of the federal bankruptcy law. An individual whose monthly income is too high will have to file instead under Chapter 13, which requires making payments for several years. However, even if a person fails the means test at first, it may still be possible to qualify for Chapter 7 debt relief after deducting certain living expenses.

Chapter 7

Filing for debt relief under Chapter 7 of the federal bankruptcy law makes it possible to obtain a total discharge of outstanding debt, with exceptions for such debts as student loans, child support, recent taxes and credit charges made for nonessential items within 90 days of filing. Under Chapter 7, the debtor's possessions are sold to pay creditors, although the law exempts certain assets from liquidation, such as retirement funds, veteran benefits, life insurance and personal property up to a specified value, depending on the item.

The Means Test

Generally, if the debtor's income is sufficient to repay at least 25 percent of his outstanding consumer debt over five years and exceeds the annual median family income in his state, the bankruptcy filing must be made instead under Chapter 13, which requires the debtor to follow a payment plan for three to five years. According to the Department of Justice's Trustee Program, the median income is based on U.S. Census data and number of individuals in the debtor's family. In calculating monthly income in connection with the means test, the amount can be reduced for certain expenses.

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Standard Expense Exceptions

Under Chapter 7, the amount of the filer's deductible monthly living costs is generally determined by the national and local standards set each year by the Internal Revenue Service. These standard amounts can be included for the debtor, dependents and, in the case of joint filing, non-dependent spouse. The national standard includes such expenses as food, clothing, household supplies, personal care products and out-of-pocket health care costs. State standards cover such costs as utilities, rent, cable television, phone and Internet. In reducing monthly income to reflect living costs, these national and local standard amounts are used even if they are substantially less than the filer's actual expenses, although Chapter 7 does give the judge discretion to make an upward adjustment for expenses for food, clothing, housing and utilities if reasonable and necessary.

Actual and Reasonable Expense Exceptions

In addition to the national and local standard expense levels set by the IRS, Chapter 7 also establishes several categories in which expenses can be deducted from the monthly income amount. For example, monthly income can be reduced by actual and reasonable expenses for health insurance, disability insurance and health savings accounts for the filer, filer's spouse and any dependents. Other categories include care for elderly or disabled family members, expenses connected with protection from domestic violence, school-related expenses for dependent children, tax obligations, payments for secured debts, bankruptcy administration costs and involuntary payments related to employment, such as union dues or uniform expenses.

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Disposable Income Used in Chapter 13



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Reasons to File Chapter 13

Filing a Chapter 13 bankruptcy petition enables a debtor to pay back debts over a three-to-five year period, through a court appointed trustee. Unlike other forms of bankruptcy, the debtor does not risk losing his home or car through liquidation as long as his monthly payments are current. After successful completion of the Chapter 13 plan, all unsecured debts, such as credit card debt, listed at the time of the bankruptcy filing, are discharged and the debtor's secured debts, such as a car loan or mortgage, are returned to good standing.

California Bankruptcy Law: Maximum Income

When you file for Chapter 7 bankruptcy in California, the court will consider your monthly income to determine your eligibility. Chapter 7 bankruptcy involves selling your assets to repay your creditors. At the end of the bankruptcy case, you will receive a bankruptcy discharge and all debts included in the case will no longer be legally enforceable. However, the maximum income you can earn in California and still be eligible to file for Chapter 7 bankruptcy is $47,433 for a one-person family and $74,122 for a four-person family, as of 2012.

Chapter 7 Bankruptcy & Income Threshold in Illinois

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.


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