When you file bankruptcy, the court has to approve the plan. Depending on your circumstances, they could discharge your debts, reorganize them, or deny the bankruptcy altogether. In some cases, when you file Chapter 7 bankruptcy, it fails and is instead converted to a Chapter 13 bankruptcy. In any case, a large portion of the success or failure of your bankruptcy relies on your income. This is because the courts don’t want people to file on debt just so they don’t have to pay it. Including a debt because you can’t afford it is one thing, but trying to get out from under it for reasons of convenience or irresponsibility is another. In order to assess how your income stands up to your debts, the courts rely on a bankruptcy means test.
Median Income Guidelines
When you are taking the means test, you will compare your income to that of the median income of your state. In order to qualify for Chapter 7 bankruptcy, your average income over the past six months must either be lower than the median income of the state in which you reside and will be filing your bankruptcy, or it must be low enough that you cannot meet required financial obligations. This is because Chapter 7 is for people who don’t have the income required to pay the debts that they are trying to manage.
Lower than the Median Income
If your income over the past six months is lower than that of the median income for people in your state, then you qualify for a Chapter 7 bankruptcy, but that doesn’t necessarily mean it will be successful. When you consider the median income for your state, be sure to compare yours to other people in your same situation. In other words, if you are a single person with no children, you can’t compare your income to a single parent who is supporting four children.
Disposable Income and Bankruptcy
Disposable income is the income that is left over after you have taken care of all of your expenses for the month. To calculate your disposable income, you subtract necessary expenses from your income, but be aware that there are limits on these expenses. These limits are designed to prevent people from filing bankruptcy when they can’t afford payments just because they are irresponsibly living lifestyles they can’t actually afford. That’s why some of the deductions, like clothing and food, follow the IRS standard rather than the actual amounts spent. Click here for more information about Chapter 7 bankruptcy (http://www.1800debtrelief.com/chapter-7/).
The cost of housing outside of a house payment or rent is considered in bankruptcy. Taxes and involuntary deductions like union dues and uniforms are also allowable. Court-ordered payments are also deductible, such as child support and alimony. However, child support and alimony received also have to be reported as part of the income for the house. The cost of taking care of someone who is chronically ill or disabled is also deductible. Even charitable contributions are allowed, but don’t expect to make the contribution the night before you file and have it be accepted. Educational expenses are allowed if they are for a disabled child or if they are necessary to keep a current job.
Since every situation is different and you may have things like derived income, take the time to explain the details of your income and debts to your lawyer so that he or she can put you on the path that works for you.