It can be hard to believe, but some people do make too much money to file bankruptcy under Chapter 7. However, that does not mean they cannot file for bankruptcy relief under Chapter 13. The first step to determine if your income qualifies for a Chapter 7 is to complete the bankruptcy Means Test.
What is the Bankruptcy Means Test?
When Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), it added an income qualification for filing under Chapter 7. The Means Test is intended to help in preventing bankruptcy fraud. It limits debtors in Chapter 7 to individuals who cannot afford to pay any significant amount to their unsecured creditors. In other words, Chapter 7 bankruptcy cases are reserved for low-income debtors who do not have adequate disposable income to pay debts.
Passing the Means Test for Chapter 7 Cases
The Means Test compares your average income to the median income of a household of the same size in Maryland. Your average income is based on household income from all sources within the past six months.
If your average income is below the median income, you “pass” the Means Test and can proceed with a Chapter 7 case. However, if your average income is above the median income in Maryland, you “fail” the Means Test. However, you have another chance to pass the test to file under Chapter 7.
The second section of the Means Test measures your disposable income. Allowable deductions are subtracted from your average income to calculate disposable income. Examples of allowable deductions include income taxes, housing, insurance premiums, food, clothing, daycare, medical expenses, utilities, court-ordered support payments, vehicle payments, and other monthly expenses.
Some expenses are capped unless you meet very strict requirements for exceeding the limits. In addition, you cannot claim any expense as a reasonable monthly expense. For instance, you will probably not be allowed to claim $300 for pet food and supplies as a monthly expense.
After deducting all allowable expenses from your average monthly income, the remaining amount is your disposable income. If your disposable income is above a certain amount, you do not qualify to file under Chapter 7, but you can file under Chapter 13.
Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy
A Chapter 7 bankruptcy case is a liquidation bankruptcy case. The debtor does not have enough money to pay his or her debts. In a Chapter 7 case, the debtor does not repay unsecured debts that are subject to a bankruptcy discharge.
Therefore, the Chapter 7 trustee reviews the debtor’s assets to determine if any property has equity that may be liquidated to pay unsecured debts. If the Chapter 7 trustee identifies property that may be sold, he seizes the property and sells it for the benefit of unsecured creditors.
However, bankruptcy exemptions protect most of the equity in a debtor’s property. Most of the Chapter 7 cases filed in Maryland are no-asset Chapter 7 cases. In a no-asset Chapter 7 case, the debtor keeps all his or her property while getting rid of most, if not all, unsecured debts.
A Chapter 13 bankruptcy case is a reorganization bankruptcy. The debt proposes a Chapter 13 repayment plan that reorganizes debt into a manageable monthly payment. In many cases, the debtor pays a small percentage of his or her unsecured debts. Therefore, a Chapter 13 debtor can get rid of thousands of dollars in unsecured debts for pennies on the dollar.
A benefit of filing under Chapter 13 is the ability to catch up past due mortgage payments to stop a foreclosure sale. In addition, debtors can often lower car payments through the Chapter 13 plan to make a vehicle more affordable. If a debtor has equity in property that is not protected by bankruptcy exemptions, the debtor can prevent the property from being seized by a bankruptcy trustee by filing under Chapter 13.
Are All Debts Dischargeable in Bankruptcy?
No, some debts are not eligible for a discharge in bankruptcy. Alimony and child support are never dischargeable in a bankruptcy case. However, you can repay past due alimony and child support through a Chapter 13 plan to avoid a contempt action.
Most income taxes are also not eligible for a discharge, but you can repay the tax debt over 60 months in a Chapter 13 case. Student loans are also not eligible for a bankruptcy discharge except in extremely limited cases.
Ask a Maryland Bankruptcy Attorney if You Make Too Much Money to File Bankruptcy
Our Parkville bankruptcy attorneys can analyze your financial situation to determine if you qualify to file for bankruptcy relief under Chapter 7 or Chapter 13. With the help of an experienced bankruptcy attorney, you can get out of debt and get a fresh start.
Contact Pinder Plotkin LLC by calling 410-661-9440 to schedule your free consultation with a Maryland bankruptcy lawyer.
The information provided in this website is provided for informational purposes only, and should not be construed as legal advice on any subject. The information contained in this blog is also subject to change and should not be relied upon. Contact the Pinder Plotkin Legal Team for a FREE consultation.