Bankruptcy: The Income Eligibility Requirement

You may have heard all the bankruptcy buzz last year but didn't pay much attention to it. Most of my clients fall into that category. In general most people don't learn much about bankruptcy until they are faced with a financial crisis and the decision of whether to file.

You may be surprised to learn that most people who file bankruptcy didn't plan on racking up a bunch of debt, living the high life for a little while and then filing bankruptcy to avoid having to pay back the debt. Instead, most people who file bankruptcy have done so because of unexpected medical bills, divorce or some other life changing event that has turned themselves and their families upside down financially. Most of these people have tried months and even years of "subsistence living" using credit cards and other loans to get hoping that things would get better. The problem is, things didn't get better.

That being said, the new bankruptcy laws have redefined (translation: tightened up on) who is eligible to file bankruptcy and the procedures for filing bankruptcy. This post deals with one of the more prominent changes affecting who can file bankruptcy.

The New Bankruptcy Changes
Among other things, the new bankruptcy rules require that: (1) all debtors get credit counseling before they can file a bankruptcy case (more on this in a future post); (2) debtors with higher incomes won't be allowed to file Chapter 7 (liquidation) but will instead have to repay at least some of their debt under Chapter 13 (addressed in this post); and (3) lawyers must comply with new bankruptcy standards (also to be addressed in a future post).

To determine whether you are eligible for filing Chapter 7 (debt discharge without any repayment), the new rules require that you balance your current monthly income against the median income for a family of your size in your state. Your current monthly income is determined by looking at your average income over the six months leading up to the date you filed bankruptcy. For most people, especially those filing bankruptcy because they recently lost a job, their current monthly income will be much more than they actually earn monthly at the time they file bankruptcy.

Once you've calculated your income, compare it to the median income for your state. You can find median income tables, by state and family size, at the United States Trustee. If your income is less than or equal to the median, you can file for Chapter 7. If it is more than the median, however, you must pass the "Means Test" in order to file for Chapter 7. The means test will also be addressed in a future post.

Other Related Bankruptcy Posts
Bankruptcy: Is it right for you?    Bankruptcy: The income eligibility requirement    Bankruptcy: The means test   Bankruptcy and student loans
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