What is the Income Limit for Filing Chapter 7 Bankruptcy?

Disclaimer: We are not qualified bankruptcy professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.

Facing overwhelming debt can lead you down the path of considering Chapter 7 bankruptcy as a fresh start. However, navigating the income requirements for eligibility can seem daunting.

In this guide, we'll clarify the income limits for filing Chapter 7 bankruptcy, simplifying the means test and providing you with the knowledge to understand if you qualify. Whether you're just starting to explore bankruptcy or ready to take the next steps, our insights will help you make an informed decision.

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Understanding State-Specific Chapter 7 Income Limits

While discussing the income limits for filing Chapter 7 bankruptcy, it's crucial to recognize that these limits can vary significantly from one state to another, reflecting the median income levels of each state's residents.  For instance, with a Chapter 7 Bankruptcy, the income limits are tailored to the economic conditions and median income of Pennsylvania households.

This means that if you're considering filing for Chapter 7 bankruptcy in Pennsylvania, you'll need to specifically look at the PA income limits to determine your eligibility. These state-specific nuances are essential for potential filers to understand, as they directly impact one's ability to file for bankruptcy under Chapter 7. Just like the example provided for Oregon earlier, each state has its own set of guidelines and income thresholds that dictate who can and cannot file for this type of bankruptcy relief.

What is Chapter 7 Bankruptcy?

Bankruptcy is governed by federal bankruptcy law. Bankruptcy is a legal action that, for Chapter 7 bankruptcy, eliminates all or most debt. To do that, the debtor's assets are sold and the proceeds then are used to pay off as much debt as possible. The rest is forgiven.

Not all debts can be included in Chapter 7 and not all income figures into the Chapter 7 means test. You might wonder, 'Do you get out of all debts if you declare bankruptcy?'. The answer is complex and involves understanding which debts can be discharged.

Several wrinkles make bankruptcy a less-than-desirable option. Liens can be placed against certain properties so that when they are sold, the lien must be repaid. Another problem is that bankruptcy is complex and expensive.

Personal bankruptcy also comes with a lot of social stigmas. And the final issue is that bankruptcy stays on your credit report for up to 10 years. Bankruptcy laws can be very complex. You may want to hire a qualified law firm to help you through your local bankruptcy court.

Who is eligible for Chapter 7?

• To be eligible for Chapter 7 bankruptcy, a person must
  
• not have filed any bankruptcy within 180 days before the bankruptcy court date if
• they did not show up for the court date
• they had a previous fraudulent bankruptcy case
• the case was dismissed after a creditor asked the court to lift the automatic stay
• not have a Chapter 7 within 8 years
• not have a Chapter 13 within 6 years
• must meet the means test

In general, if your household income exceeds the income guidelines for Chapter 7, which is based on your state's median household income, you may not be eligible. However, the only way to determine that for certain is to fill out a Chapter 7 means test.  Determining the best time to file bankruptcy can significantly impact the outcome and your future financial stability.

Additionally, understanding the qualifications for Chapter 7 bankruptcy involves meeting specific criteria, including not having a Chapter 7 within 8 years, not having a Chapter 13 within 6 years, and passing the means test.

If you make too much income or have too much disposable income, you may want to look into Chapter 13 bankruptcy. However, it’s critical to evaluate if bankruptcy is the right step, especially if credit card debts are your major concern. Consider exploring why you should or should not file bankruptcy due to credit card bills before making a decision.

Requirements to file Chapter 7

• To file for Chapter 7, you must meet the following criteria:
  
• Be an individual or a partnership, corporation, or other business entity with business debt
  
• Pass a chapter 7 means test
  
• Receive credit counseling within 180 days before the filing
  
• Meet the state's minimum residency requirements
  
• Attend a 341 Creditor meeting
  
• Complete a financial management course within 45 days of the 341 Meeting of the Creditors.
  
• File a debt management plan if developed during the credit counseling
  

Who should consider Chapter 7 bankruptcy?

• total debts are more than half your annual income
• most debt is unsecured debt
• it will take at least 5 years to pay off your debt making monthly payments
• your debt interferes with life
• you have little to no disposable income after monthly expenses
• your current monthly income is below your state's median household income
  

Reasons to not consider bankruptcy

Bankruptcy should be the last resort to achieve debt relief. Some options are less damaging to your credit and your financial reputation. Consider that for the next ten years every creditor who sees your credit report will also see a bankruptcy. Unless your credit score is stellar, they will be less enthusiastic about lending you money.

The same issues occur when applying for a job. Employers may see bankruptcy as a red flag and this could badly affect your expected annual income.

Cost is another concern. The filing costs range from $300 to 400 dollars and generally must be paid upfront. As you will see, the paperwork is complex, and having a bankruptcy lawyer guide you through the process can be invaluable. Add on another $1000 or so for your bankruptcy attorney fees. Most Chapter 7 bankruptcy cases must be paid upfront.

Bankruptcy relief is not for everyone. Before you decide on one method of relief, search out all the available options including debt settlement, debt consolidation, and credit counseling.

What is the maximum income to file Chapter 7 bankruptcy?

There is no set maximum income level or average monthly income. Instead, there is a formula that is applied to each debtor individually. Chapter 7 means the test is the first stage in understanding whether you qualify for Chapter 7 bankruptcy.

The court does have a disposable income limit. This is roughly $200 a month. You may be able to justify additional expenses that will offset the disposable income limit.

As a general rule, if your median income for your household size is over the state's median income, you may not be able to file for Chapter 7. However, a bankruptcy means test will indicate if you can seek bankruptcy relief.

Chapter 13 bankruptcy

If your annual household income minus allowable expenses exceeds the bankruptcy means test or you have enough disposable income, you may qualify for Chapter 13.

What is the Chapter 7 means test?

The means step is a mandatory part of filing for bankruptcy. The bankruptcy court will have the chapter 7 means test or follow this link. You will need the following information to fill out the means test:

• Last six months of income
  
• Your spouse's income, including commissions and bonuses
  
• Monthly expenses include:
• Amount of car payments and how much you spend on gas
• Childcare costs
• Student loan payments and other tuition costs
• Work-related expenses (uniforms, etc)
• Housing, utilities, and other transportation expenses
• Income tax information
  

The means test calculation uses IRS expense standards for the following:

• Food
  
• Housekeeping supplies
  
• Personal care products and services
  
• Miscellaneous

The standard for allowable living expenses is based on household size and where you live. For instance, in 2020, the food portion of household expenses was $386 per month for one person and $958 for four people. Find IRS expense standards here.

If you have questions on the means test calculation, contact a not-for-profit credit counselor for more information - you will have to work with a credit counselor before filing for bankruptcy anyway.

A bankruptcy law firm can be a good option to help with the means test calculation.

Use an Online Chapter 7 Means Test Calculator

The Chapter 7 means test involves some complex calculations to determine if your income and expenses qualify you for a Chapter 7 bankruptcy filing. Rather than trying to work through the math yourself, use an online tool to have it done for you.

The United States Courts website provides a Step-by-Step Means Test Calculator that walks you through the process in a user-friendly way. First, enter your state and household size, which it uses to pull the median income. Next, it has you input your average monthly income over the past 6 months. You'll enter income like wages, commissions, rental income, etc.

The calculator then goes through all allowable expenses, having you enter things like payroll deductions, child care costs, mortgage/rent, food, utilities, and more. It does the math based on IRS standards and your actual expenses. In the end, it takes your income less expenses and tells you clearly whether you pass or fail the Chapter 7 means test.

Using this calculator ensures your means test is calculated properly. It also creates a printable report to show your bankruptcy attorney or trustee documenting that you qualify for Chapter 7 based on your income and expenses.

What means test income is used for Chapter 7 bankruptcy?

When filling out the Chapter 7 means test, always tell the truth! Hiding monthly income will not help you and can result in the dismissal of your Chapter 7 case.

• You will report all income within the last six months including:
  
• your current monthly income including salary and wages (gross income)
  
• monthly income from cash jobs
  
• monthly income from temporary jobs
  
• monthly income from unreported income
  
• investment income from CD, stock, rental income, inheritance, inheritances, and trust funds
  
• gambling and lottery income

Consider Hiring a Bankruptcy Attorney

The Chapter 7 income limits and means test calculations may seem straightforward on the surface. However, properly applying the rules to your unique financial situation can get complicated.

If your income is near the median for your state and household size, it's especially important to calculate the means test correctly. Even small errors can push you over the limit. The same is true if you're not sure which of your expenses qualify to be deducted.

In situations like these, consider hiring a bankruptcy attorney to handle your Chapter 7 case. An experienced bankruptcy lawyer will carefully evaluate your specific income sources and ensure all applicable expenses are included on the means test.

They will probe for any deductions you may have overlooked that could make the difference in qualifying for Chapter 7. These could include contributions to retirement accounts, union dues, specialized work clothes, and more.

An attorney can also advise if you qualify for exemptions like being primarily self-employed or having non-consumer business debts. Their expertise can mean the difference between being able to file Chapter 7 versus being forced into Chapter 13 repayment.

Attorney's fees average $1,200 to $3,500 nationwide, depending on the complexity of your case. In some situations, you may be able to find low-cost or pro bono legal aid.

What household items are protected in Chapter 7 bankruptcy?

In general, the following items and household expenses are protected in bankruptcy filing:

• personal property
• homesteads
• tools of the trade
• clothing
• household goods

There are quite a few household expenses that are protected, so contacting someone knowledgeable about those expenses is very important. Many of the household expenses are based on household size. For instance, mandatory retirement contributions are a protected household expense.

What household income is protected in Chapter 7 bankruptcy?

The following income is protected in a bankruptcy case.

• unemployment income
  
• pensions and retirement income
  
• workers compensation
  
• health insurance monthly payments
  
• disability insurance monthly payments
  
• welfare benefits
  
• Social Security income
• child support

Because the Chapter 7 bankruptcy code is very complex, hiring a qualified bankruptcy lawyer may be worth the expense.

What debts can be discharged with a Chapter 7 bankruptcy?

The following debts can be discharged in a Chapter 7 bankruptcy:

• consumer debt like credit card debts
  
• most unsecured debts and personal loans
  
• medical, dental, and hospital bills
  
• leases
  
• negligence claims
  
• civil judgments with some exceptions
  
• repossession deficiencies - for instance, you owe money on a repo car
  
• certain types of tax debts. Taxes must meet the following criteria
  
• taxes are on wage-related income or gross receipts for business income
  
• income taxes were due at least three years (including valid extensions) before filing for bankruptcy
  
• tax returns were filed at least two years before you filed the bankruptcy case
  
• the tax is on your business books as a tax liability for at least 240 days before filing for bankruptcy
  
• No fraud or tax evasion attempted

What debt can not be discharged with a Chapter 7 bankruptcy?

Filing bankruptcy does not erase all debt. Some debts must be repaid in full.

These debts include:

• most secured debt (with some exceptions) including mortgage payments
  
• debts acquired through fraudulent actions
  
• student loans
  
• child support and spousal support (alimony payments)
  
• current tax obligations
  
• tax liens

The government takes debts like taxes and child support very seriously. Do your best to stay current on these obligations.

Non-Consumer Debt Exemption

If over half your debts are non-consumer debts related to operating a business, you may qualify for an exemption from the Chapter 7 means test. These business-related debts are also called commercial debts or debts incurred for profit.

Some examples of non-consumer debt include:

• Business equipment leases
• Inventory or supply loans
• Unpaid vendor bills
• Business credit card balances
• Business loans or lines of credit

To determine if you qualify for this exemption, make a list of all your debts, personal and business. Total the amounts owed in each category. If the business debt total is greater than 50% of your overall debt, you meet the criteria for a non-consumer debt exemption.

This exemption does not apply to personal debts like student loans, back taxes owed, and domestic support obligations like child support or alimony. Those would still be subject to the means test.

Having primarily business debt makes you eligible to file Chapter 7 without completing the means test. Be sure to disclose your eligibility for this exemption to your bankruptcy attorney when first consulting about filing Chapter 7.

What are the steps to file for bankruptcy?

The bankruptcy steps can be complex and expensive. Hiring a bankruptcy lawyer may be a very important step and make it easier to file bankruptcy.

Once you have decided to file for bankruptcy, you will complete the following within 180 days of your filing date:

1. Complete the required credit counseling course. You should receive a certificate to attach to Exhibit D.
2. Next, file the Chapter 7 Bankruptcy Petition and pay the filing fee
3. Within 15 days, you will file the following paperwork and pay the filing fees

• Debtor’s Request to Activate Electronic Noticing (DeBN) (optional form for individual debtors to request court-generated notices and orders by email)
• Official Form 101 - Voluntary Petition for Individuals Filing for Bankruptcy
• Your Social Security Numbers or Individual Taxpayer Identification Number
• Official Form 103A - Application to Pay Filing Fee in Installments by Individual Debtor(s) if applicable 
• Official Form 103B - Application to Have the Chapter 7 Filing Fee Waived – if applicable 
• Official Form 106 - Summary - A Summary of Your Assets and Liabilities and Certain Statistical Information - Individual
• Official Form 106 - Declaration - Declaration About an Individual Debtor’s Schedules
• Official Form 107 - Your Statement of Financial Affairs for Individuals
• Official Form 108 - Statement of Intention for Individuals Filing Under Chapter 7
• Official Form 122 - A-1 - Chapter 7 Statement of Your Current Monthly Income
• Official Form 122A-1 SUPP - Chapter 7 Means Test Exemption – if applicable 
• Official Form 122A-2 - Chapter 7 Means Calculation - if applicable 
• Exhibit D - Certificate of Credit Counseling
• Mailing List of All Creditors Notice - the will be your unsecured creditors
• Form 2010 for Individuals Filing for Bankruptcy – do not file this document
• Official Forms 106 A/B – J: Schedules A/B through J

1. Schedule A: Real Property
2. Schedule B: Personal Property
3. Schedule C: Property Claimed as Exempt
4. Schedule D: Creditors Holding Secured Claims
5. Schedule E: Creditors Holding Unsecured Priority Claims
6. Schedule F: Creditors Holding Unsecured Non-Priority Claims,
7. Schedule G: Executors Contracts and Unexpired Leases
8. Schedule H: Co-debtors
9. Schedule I: Current Income of Individual Debtor
10. Schedule J: Current Expenditures of Individual Debtor, Statistical Summary of Certain Liabilities and Related Data, Declaration Concerning Debtors and Schedules.
11. When all paperwork is filed, the court notifies creditors that they must suspend their ongoing debt payments collection effort
12. The bankruptcy trustee is appointed to oversee the bankruptcy case. The trustee reviews bankruptcy forms and petition sells the nonexempt property and distributes the proceeds
13. The court and trustee will evaluate the debtor's secured debts and you have the right to pay creditors, reaffirm the debt or have assets repossessed
14. Attend the 341 Creditor Meeting
15. Take the personal financial management class and file Form 23
16. Unsecured debt and other debt are discharged
    

Definitions

• Unsecured debt - debt that is not backed by an asset. Medical debt is a type of unsecured debt
• Disposable income - money left over after all monthly expenses are paid. The court expects that you will use disposable income to pay off debt. You may be able to file for exceptions to the disposable income limit
• Median income - this is the income amount per person that 1/2 the population exceeds and 1/2 the population does not meet. The federal government considered median family income based on state/territory and family size. Median household income is the amount per household. For instance, the median income in California is $33,719. The median household income is $80,440.
• Average income - this means that all the incomes for your state are added together and divided by the number of incomes. In 2021, the average income per person in California was $76,386. The median income is considered more accurate because it essentially drops the very high and very low incomes out of the equation. The median income is determined with data collected by the census bureau on an ongoing basis.
• Profit motive - because Chapter 7 also includes businesses, you may see business or profit motive mentioned in the paperwork. This is non-consumer debt incurred while trying to make money. If you have more than 50% of your debt in nonconsumer debt, you are exempt from the means test calculation.
• Income limits - these are set by each state based on local standards. How much income is too much depends on your state's median income and your means test.
  

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