Qualifying for Chapter 7

The 2005 Amendments

In 2005 Congress passed sweeping amendments to the bankruptcy code (known as the Bankruptcy Abuse Prevention and Consumer Protection Act, or BAPCPA) with the intention of making access to chapter 7 bankruptcy more difficult. However, as it turned out, the majority of those who file bankruptcy are still eligible to obtain a discharge through chapter 7. It is estimated that about 75% of those who seek to file for chapter 7 are not affected by the income limitations imposed by the 2005 changes to the bankruptcy laws. The only consequences for most was the requirement of additional paperwork, deadlines, technical requirements, potential pitfalls and other burdens for debtors and their attorneys.

The Means Test

One of the key changes to the bankruptcy laws in 2005 was the introduction of the Means Test, a form which must be filed in every consumer bankruptcy case as of October 17, 2005. The Means Test involves a formulaic calculation to determine whether a bankruptcy debtor has the ability to pay a meaningful amount towards his or her unsecured debts through a chapter 13 bankruptcy. This determination is based on a six-month average of income based on the full six months immediately prior to the filing of the bankruptcy and the application of certain allowed expenses. If you are below the median gross income for a household of your size in Florida (for example, currently $41,065 for a household of one, $50,711 for a household of two, and $53,820 for a household of three), then expenses do not have to be applied and you “pass” the means test. But if your income is above the median then your expenses are analyzed through the statutory formula and criteria under the Means Test.

Debtors Who Have Above-Median Income

If the Means Test shows you have enough income to pay unsecured creditors, then your case may be dismissed without a discharge under chapter 7. If this happens, there are options such as trying to continue with a chapter 7 or converting the case to chapter 13 and seeking a discharge under chapter 13. However, many people who have income at or above the median for their household size still qualify for chapter 7 (or “pass” the Means Test) because they are able to claim enough expenses to show the court that they do not have enough disposable income to warrant having to pay their creditors each month through a payment plan in a chapter 13 bankruptcy.

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