Make too much money and you’re not qualified for Chapter 7 bankruptcy, the experts say. Sometimes, even the experts get it wrong.
One of the most startling aspects of the bankruptcy law is the means test, the all-too-complex calculation that is supposed to determine your eligibility to pay your debts.
Pass the means test and it’s assumed that you can’t pay your debts.
If you fail, however, the whole apple cart gets turned over.
Or does it?
The Basics Of the Means Test
If your income over the six months immediately prior to filing for bankruptcy is above the median income for a household of your size in the state in which you live, a “presumption of abuse” is raised. File for Chapter 7 bankruptcy and you could end up either having your case dismissed or converted to one under Chapter 13.
The means test is only required in that situation, though. If your income is below the line, you don’t need to worry about means testing.
The bright line, however, is not a point of art. Where a bankruptcy lawyer becomes truly handy is when tackling one of the big exceptions to the test for eligibility.
Who Gets To File For Chapter 7 Bankruptcy?
John has been struggling for years with his finances. He lives alone and earns $60,000 per year at his job. He has student loan debts of $100,000, and multiple credit card debts totaling $124,000. He owns no real estate, and just had his only vehicle repossessed, so he has no car. He has no health insurance. His take home pay is barely enough to cover his monthly expenses, not counting his credit card and student loan payments.
Bill has big debt problems too. He owes $500,000 in tax debts, and another $20,000 in credit cards. He owns a nice house with mortgages totaling $400,000 and a new car on which he owes $25,000. Bill is an executive at a company. He has a base salary of $600,000 per year, and receives annual incentive bonuses usually in the range of $100,000+ per year. His take home pay greatly exceeds his monthly expenses and he could pay a substantial percentage of his total debts over 5 years.
Only Bill is going to be able to file for Chapter 7 bankruptcy because John doesn’t pass muster.
The Means Test Does Not Always Apply
John’s debts are primarily consumer-based debts, which means they were “incurred primarily for a personal, family, or household purpose” whereas Bill’s debts are comprised primarily of taxes – which are not considered to be consumer debts.
Individual debtors whose debts are primarily nonconsumer are not subject to the means test. Therefore, Bill passes while John is relinquished to Chapter 13 bankruptcy.
Review Every Debt – Line By Line
How to determine whether a particular debt is consumer or nonconsumer can be tricky. Even when looking at a credit card debt, your lawyer may find that the charges weren’t all for consumer purposes.
A few dollars here and a few pennies there may mean the difference between an onerous fight in Chapter 7 bankruptcy or means test nirvana.
Image credit: Damian Gadal