Q.Who is eligible under the new bankruptcy law to file a Chapter 7 Bankruptcy?
A.Under the new law, bankruptcy applicants who wish to file under Chapter 7 must now meet stricter income eligibility requirements, and pass a "means test."
The first eligibility requirement for a Chapter 7 bankruptcy applicant is an income requirement. All debtors filing for bankruptcy must submit a statement of "current monthly income," whether above or below the state median income level. A Chapter 7 bankruptcy applicant's "current monthly income" is defined as the applicant's "average monthly income for the six months preceding the bankruptcy filing." To qualify for a Chapter 7 bankruptcy filing, the applicant's average monthly income for the six months preceding the bankruptcy filing must be less than the Median Income in his or her state. For many people, particularly those who have decided to file for bankruptcy because a heath crises or job loss just put them over the edge, the "current monthly income," which is really the average income of the bankruptcy applicant for the six months preceding the filing, will be much more than his or her actually monthly income at the time of the bankruptcy filing. If your average monthly income is equal to or less than the median income in your state, you can file a Chapter 7 bankruptcy petition. If your average monthly income is more than the median income in the state, you must pass "the means test" in order to file a Chapter 7 bankruptcy petition, or file a Chapter 13 Bankruptcy petition instead.
To determine if a bankruptcy applicant passes "the means test", you start with the applicant's average monthly income for the six months preceeding the bankruptcy filing and you subtract: (1) certain "allowed expenses," in the amounts set by the Internal Revenue Service (11 USC §707(b)(2)(A) ) and you subtract (2) monthly payments the bankruptcy applicant must make on "Secured Debts" and "Priority Debts." Secured debts are those for which a creditor has collateral (e.g., mortgage on your home). Priority Debts are legal obligations such as child support, alimony, tax debts, and back owed wages to employees.
If the total monthly disposable income after subtracting these two amounts is less than $100 ($6,000 over a five year period), the bankruptcy applicant passes the means test and may file a Chapter 7 Bankruptcy petition. If the total remaining monthly disposable income is more than $166.66, the applicant must file a Chapter 13 Bankruptcy Petition.
So what about that $66.66 discrepancy? If the bankruptcy applicant's remaining disposable monthly income falls somewhere between $100 and $166.66, then the bankruptcy applicant must pass one final test before being allowed to proceed with a Chapter 7 Bankruptcy petition. Under that final test, if the remaining disposable monthly income is not sufficient to pay in excess of 25% of the bankruptcy applicant's unsecured, non-priority debts (e.g., credit card bills, student loans, medical bills, etc…) over a five-year period, the bankruptcy applicant may proceed with a Chapter 7 Bankruptcy. If it is sufficient to cover 25% of the unsecured non-priority debts under a five year monthly payment plan, then the bankruptcy applicant must proceed with a Chapter 13 Bankruptcy Petition.