If you are at the point of being overwhelmed by debt without an easy path out, it may be time to consider whether or not bankruptcy is a valid option for you. Before you file for a Chapter 7 bankruptcy discharge, you should first determine if you meet the income limit for getting a Chapter 7 bankruptcy discharge from the bankruptcy court.
Although Chapter 7 bankruptcy is often the cheapest, quickest and easiest bankruptcy to file under, debtors still have some stringent requirements they must meet before the bankruptcy discharge is issued.
The entire purpose of filing a bankruptcy case is to get a bankruptcy discharge, as it releases the debtor from any legal obligation to repay the debt. Without getting a bankruptcy discharge, you are obligated to pay every dollar you own in 2024 to destroy your debt.
Understanding The Income Limit For Chapter 7 Bankruptcy Cases
Before getting started, it is important to realize that bankruptcies can vary from state to state. For instance, if you file for Chapter 7 bankruptcy in Michigan, it may look different than an Ohio Chapter 7 bankruptcy or a Texas Chapter 7 bankruptcy. Keep this in mind when moving forward with filing for bankruptcy in the states of TX, MI, or OH.
Congress revised the law that guides who get a bankruptcy limit in 2005, during which they added an income limit for anyone who wishes to file under Chapter 7 bankruptcy. BAPCPA (the Bankruptcy Abuse Prevention and Consumer Act) was set up to change the way debtors qualify to get a discharge under the Chapter 7 bankruptcy debt relief plan. The reason for this modification was to prevent abuse by high net worth individuals, and ensure that only those who can’t afford to pay their debt qualify for a discharge.
Why Income Limits Are Important In Chapter 7 Cases
Your income can stop you from getting a bankruptcy discharge if it is above Chapter 7 income limit for your state of residence. Although, this income limit doesn’t stop you from filing a Chapter 7 bankruptcy case, as you can file irrespective of what you earn. In other words, that you filed for bankruptcy does not necessarily mean that you’ll get debt relief as the bankruptcy court can reject your application based on abuse.
If you notice that your income is higher than the acceptable income for Chapter 7 bankruptcy, then, the most suitable alternative is to file under Chapter 13 bankruptcy to get a discharge, the general assumption is that if your income is higher than the state’s median income; then, you can afford to pay part of your debt to unsecured creditors.
Unsecured creditors are those that don’t have a lien on your property; as such, they are at risk of losing money when you’re unable to pay back. Some examples of debts in this category are medical bills, credit cards, and personal loans.
Here are the income limits for the following states for cases filed after 2023. If your household size is greater than 5, you would add $9000 per member.
Michigan
# Of People : Annual Income
1 : $53,815
2 : $67,015
3 : $80,465
4 : $99,179
5 : $108,179
Texas
# Of People : Annual Income
1 : $52,953
2 : $71,287
3 : $77,110
4 : $89,196
5 : $98,196
Ohio
# Of People : Annual Income
1 : $52,415
2 : $67,059
3 : $79,022
4 : $96,175
5 : $105,175
Let’s now discuss how income works in the Chapter 7 means test.
How To Calculate Income For The Chapter 7 Means Test
The first thing is to show the proof of your earnings in the last six months. Income is calculated based on what you earned six months prior to filing a Chapter 7 bankruptcy case. As such, if you’re filing for a Chapter 7 bankruptcy on July 10, then you have to show your proof of income from January 1 to June 30.
The income that should be declared is those earned and those from other sources, with the exception earned as a result of the Social Security Act. When calculating the Chapter 7 Means Test, you won’t add income from SSI, SSDI, and Social Security retirement income.
Some of the incomes used in calculating Chapter 7 Government Means Test are:
● Unemployment income
● Royalties, dividends, and interest
● Salaries and wages, including commissions, bonuses, and overtime
● Rental Property Income
● Income from operating a business or self-employment
● Income from workers’ compensation
● Spousal support and child support
● Pensions, annuities and retirement income
● Income from private disability insurance
● Income from others in the household, such as money from a friend, parent, roommate, or domestic partner
Also, if this feels complex, a free Chapter 7 means test calculator can help you estimate qualification.
Completing The Means Test
Your bankruptcy attorney may be able to fill out all of this information for you unless you decide to file without an attorney.
Section One—Median Income
Before filing the first part of the means state, you should first understand two terms, which are: annual median income and current monthly income (CMI). The annual median income in itself is calculated based on your CMI.
If you want to calculate CMI, the income you got for six months prior to filing for Chapter 7 bankruptcy should be added and divided by six. Thus, if after calculating your six-month income, and the total sum is $25,000, then your current monthly income will be $25,000 divided by 6, which is $4,166.67.
You can calculate your annual median income by multiplying the CMI by 12. In the example given above, the median income will be $50,000.04 ($4,166.67 multiplied by 12).
A comparison will be made between your annual median income and the annual median income for your state of residence (See our chart below). But in a situation where your median income is lower than that of your state, then it is assumed that you’re eligible to receive a Chapter 7 bankruptcy discharge.
As stated above, the income for Chapter 7 bankruptcy is often dependent on where you are in the United States. For example, the income limit for filing bankruptcy in Tennessee may be different than the income limit for filing Chapter 7 bankruptcy in Illinois every single one of those places are going to have their own specific requirements.
Section Two—Disposable income
If you earn above the income limit for a Chapter 7 bankruptcy, you can still qualify for a Chapter 7 bankruptcy discharge if you pass the disposable income test.
Disposable income is your remaining income after deducting your mandatory payroll deductions and ordinary living expenses. You must include your disposable income when writing your Chapter 13 bankruptcy plan.
It is possible to qualify for a Chapter 7 bankruptcy discharge even if your annual median income is higher than the state’s income limit—this can happen if your disposable income is lesser than the limit stipulated by the state law.
Some expenses you can deduct from CMI to calculate disposable income are:
● Clothing, food and household expenses
● Public transportation costs and vehicle operating costs
● Disability insurance premiums, term life insurance, and health insurance
● Some health care costs
● School expenses and some childcare costs
● Alimony payments or court-ordered child support
● Some payroll deductions like uniforms, union dues, compulsory retirement savings, and payroll taxes
These expenses are determined by the number of individuals that reside in your home. Also, some acceptable monthly expenses depend on the national standards for living expenses. Monthly expenses that are high-end like golf clubs or expensive gym memberships cannot be used if you go bankrupt. Also, if your expenses seem outrageously high, then the bankruptcy court will ask you to provide proof to support your claim.
The Bottom Line On Bankruptcy
Filing Chapter 7 bankruptcy is a big decision that takes a lot of consideration. Understand the income limit for Chapter 7 bankruptcy filing in Michigan, Texas and Ohio. You can also look for alternatives to bankruptcy filing with such options as debt negotiation, debt management or debt payoff planning. If you become bankrupted, there are solutions and there is help!
