If you have a significant amount of debt and you're not able to pay what you owe, filing Chapter 7 bankruptcy can help you wipe the financial slate clean. Typically, Chapter 7 is geared toward debtors who owe primarily unsecured debt, don't make enough to cover their payments and don't have substantial assets. To qualify for Chapter 7, federal bankruptcy law requires that your income be at or below certain limits.
The Means Test
In 2005, the federal government enacted the Bankruptcy Abuse Prevention and Consumer Protection Act. The Act established new rules regarding the bankruptcy process and how debtors can qualify. One of the key provisions established the means test as a way of determining Chapter 7 eligibility. The means test is a two-part test that measures your income against your expenses and your total debt. The purpose of the means test is to prevent debtors who have sufficient income to pay their debts from filing bankruptcy.
When you file a Chapter 7 bankruptcy petition, you'll need to complete Official Form 22A to find out if you pass the means test. This form allows you to calculate your total gross income for the previous six months and compare it to your state's median income limit for your family size. If your income is less than the state's median limit for your household size, you automatically qualify for Chapter 7. Median income limits vary widely. For example, the maximum allowable income for a family of four in filing bankruptcy in Mississippi was $58,047 as of November 2012. The maximum income limit rises to $106,707 for a family of four filing in Maryland. The federal government allows you to add $7,500 to the maximum income limit for each family member in excess of four.
If you don't automatically qualify based on your income, you may still be eligible for Chapter 7 based on your expenses. You'll need to complete the second part of Form 22A and enter information about all of your monthly expenses, including housing, utilities, health care, insurance and debt repayment. If your median income is over the limit but you don't have enough disposable income left over each month to make payments to your debts, you may still be able to qualify for Chapter 7.
While Chapter 7 bankruptcy can help you to wipe out your debts, there are several negative consequences to consider. A Chapter 7 bankruptcy can stay on your credit for up to ten years, which can make it difficult to get approved for new loans or lines of credit. You may also find it harder to get hired for certain types of jobs if you've filed bankruptcy. You can only file for Chapter 7 protection once every eight years, which means you'll have to wait to file again if you rack up a lot of debt after your case is discharged.
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