Will You Qualify for Chapter 7?

Due to Chapter 7 income limits, to qualify for a Chapter 7 bankruptcy as an individual consumer (vs. a business, or an individual having mostly business debt), the bankruptcy code requires that your past finances be analyzed through a means test for Chapter 7.  Firstly, means test for Chapter 7 compares your household income over the six-month period prior to the month of your Chapter 7 bankruptcy filing to median income for a family of similar size.  Also, this test for Chapter 7 is local, meaning the Chapter 7 income limits are derived from the median income for a family of the same size as yours and in the same local area where you file your Chapter 7 bankruptcy. Again, Chapter 7 means test considers only six-months of household income for comparative purposes, ending in month prior to the month in which you file your bankruptcy.

Means Test

The next step in the means test for Chapter 7 depends on whether your household income is lower than or higher than the Chapter 7 income limits, which are the same as the median income for a family of similar size in your local area. You are presumed to be filing in good faith when your income is lower than Chapter 7 income limit. In this case, the test is over and you likely qualify for Chapter 7.  

If your income is above the Chapter 7 income limit, then there is a presumption you can afford to repay debts, but this presumption can be defeated.  However, if your income is above the Chapter 7 income limit, then you , must run both your income and expenses (both actual expenses and as determined reasonable under IRS standards) through a complex formula to determine whether you qualify for Chapter 7 or if have sufficient income to repay at least some portion of your debts to creditors.

If the Chapter 7 means test formula shows you do not have sufficient income to repay your debts, then Chapter 7 proceedings may continue.  But if the Chapter 7 means test shows you have sufficient income to repay the debt, you may need to file a Chapter 13 bankruptcy and repay some portion of your debts over the life of a Chapter 13 Plan.