Considering Filing Chapter 7 and Wondering What the Income Limit is for Chapter 7?

There is a common bankruptcy myth that high earners make too much money to file for bankruptcy. But you can potentially still qualify for Chapter 7 or Chapter 13 bankruptcy, depending on your financial situation, no matter how much money you earn. But what is the income limit for Chapter 7? During this guide, we will explore how high income earners are treated in bankruptcy, as well as the income limit for Chapter 7 bankruptcies.

Chapter 7 income limits

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, also known as BAPCPA, which mandated the Chapter 7 income limits. Chapter 7 bankruptcy typically does not involve any type of repayment plan, so Congress was worried about people abusing the bankruptcy process. In order to prevent abuse of the bankruptcy system, Congress added a credit counseling requirement for people filing any kind of bankruptcy and set income limits for a Chapter 7 bankruptcy. But what is the income limit for Chapter 7 and do you qualify? In order to figure out whether you can afford to pay part of your consumer debts as part of a Chapter 13 bankruptcy rather than filing a Chapter 7 bankruptcy, you are required to take a bankruptcy means test.

That being said, not everyone is subject to the Chapter 7 bankruptcy income limits:

• Exception for non-consumer debt. If over 50 percent of your debt is considered non-consumer debt, then you are exempt from the means test calculation. Also known as business debt, non-consumer debt is incurred with a profit or business motive. We recommend talking to a bankruptcy attorney about your situation and the kinds of debt that you have, especially if you are not sure if you have business debt.
• Exception for qualifying service members and veterans. Congress recently expanded protection to include qualifying service members and veterans with the HAVEN Act. Disabled veterans, members of the national guard and reservists called to active duty do not have to count compensation connected to their military service as part of the bankruptcy means test.

People who qualify for one of these exemptions to the Chapter 7 bankruptcy income limits need to file a form called Official Form 122A-1Supp, or the Statement of Exemption from Presumption of Abuse Under 707(b)(2), instead of the bankruptcy means test form. This form lets the bankruptcy court know that you are not subject to the income limits.

Bankruptcy means test

In order to determine what the income limit is for Chapter 7 and if you qualify, you need to take the bankruptcy means test. According to the Bankruptcy Code, any person that makes more than the median income in the state they reside in needs to take a means test to figure out if they qualify for a Chapter 7 bankruptcy, depending on their income and financial situation. 

If your means test results prove that you don’t have any discretionary income after all of your bills are paid, you can file for Chapter 7 bankruptcy, but debtors whose means test results show that they have any amount of money remaining after paying their bills need to file for a Chapter 13 bankruptcy, instead of a Chapter 7 bankruptcy. High income earners who make six figures can possibly still qualify for a Chapter 7 bankruptcy, while someone earning five figures might not, depending on the results of their means test.

Comparing your household income to the median income

The initial portion of the means test compares your average income to the median income for the same household size, depending on the state that you are filing your bankruptcy in. The income limit for your state and household size is based on census data and changes several times throughout the year. Find the most current information by going to the website for the United States Trustee (UST) on means testing and choosing the current option in the drop-down menu called “Data Required for Completing the 122A Forms and the 122C Forms,” You will see a new page on the Justice Department’s website that offers a link to the Median Family Income Based on State/Territoy and Family Size, offered by the Census Bureau. You will then be brought to a table showing median income for each state by household size.

But how exactly do you calculate your current monthly income? For the means test, it is based on your average monthly income in the six months before your bankruptcy filing, not including the month your case was filed. That means adding up all of the countable gross income, what you make before taxes and deductions are taken out, you received in the six month period you are using for your means test. You then divide the total by six to get your current monthly income. You will likely need to know your annual income as well, so simply multiply your current monthly income by 12 to see your annual income. If your annual income is less than the median annual income for your household size in your state, you pass the Chapter 7 means test. If your income is greater than the median household income, you’ve failed the first portion, but you might still be eligible to file a Chapter 7 bankruptcy, based on the second portion of the means test.

Presumption of abuse

High-income earners who file for a Chapter 7 bankruptcy need to make it apparent that they are filing their bankruptcy case in good faith, meaning that their expenses need to be reasonable and fair to their creditors. For example, you are not allowed to purchase luxury goods and services if you are unable to repay your unsecured creditors. This means that you cannot pay for your adult child’s university education while also discharging your credit cards in bankruptcy.

If you are considering filing a Chapter 7 bankruptcy and still wondering what the income limit is for Chapter 7, the Van Horn Law Group can help. Contact us or visit our website to learn more here.