If you are considering filing for bankruptcy as an individual, you have two primary options under the U.S. Bankruptcy Code: (i) you can file under Chapter 7; or (ii) you can file under Chapter 13. While each form of bankruptcy offers its own benefits and drawbacks, many people focus on Chapter 7, at least initially. This is because it allows for cancellation of their eligible debts. Chapter 7 provides for what people tend to think of as a “traditional” bankruptcy, while filing under Chapter 13 involves creating a “reorganization” plan so that you can repay your creditors over time.
But, due to the fact that a Chapter 7 bankruptcy results in the elimination of the filer’s eligible debts, there are limitations on those who are eligible to file. Along with certain technical requirements (e.g., you may not have unsuccessfully filed for a Chapter 7 bankruptcy within the past 180 days), qualifying to file for bankruptcy under Chapter 7 involves satisfying the “means test” found in §707(b)(2) of the Bankruptcy Code.
What Is the “Means Test” for a Chapter 7 Bankruptcy?
The “means test” under Chapter 7 limits those individuals who are eligible to seek cancellation of their debts through bankruptcy. Congress added the means test to Chapter 7 in 2005 in order to prevent abuse of the bankruptcy process. As stated in 11 U.S.C. §707(b):
“(1) After notice and a hearing, the court . . .may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor’s consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter. . . .
“(2)(A)(i) In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the debtor’s current monthly income [exceeds that permitted by the means test].”
Section 707(b)(2) then goes on to list a complicated set of factors and calculations that must be used to determine whether an individual’s filing would constitute an “abuse” of the protections afforded under Chapter 7 of the Bankruptcy Code.
Step 1: Your Household Income vs. Median Household Income in Wisconsin
The first step in determining if you are eligible to file for bankruptcy under Chapter 7 is to compare your household income to the median family income in Wisconsin for families with the same number of household members. “Median family income” is determined based upon data collected by the U.S. Bureau of the Census. As of May 1, 2008, the median family income figures for Wisconsin are:
- 1 earner (no other family members): $49,555
- 2 family members (including the filer): $65,097
- 3 family members: $78,005
- 4 family members: $95,492
- 5 or more family members: Add $8,400 for each family member in excess of four
If your household income is lower than the applicable median family income figure, then you qualify to file for bankruptcy under Chapter 7. However, if your household income exceeds the relevant median, then you must complete the full means test.
Step 2: Determining Your Income, Expenses, and Deductions
In order to formally complete the means test under Chapter 7, it is necessary to complete and submit Official Form 122A-2 (Chapter 7 Means Test Calculation), which is available through the federal courts website. Unfortunately, this is not as easy as it sounds. While the form itself is nine pages, it comes with 47 pages of instructions, and making mistakes could have significant negative ramifications for your bankruptcy filing.
In broad terms, the means test is intended to discern whether a potential Chapter 7 filer has sufficient “disposable income” to pay off all or a portion of his or her unsecured debts. If you have too much disposable income, then you are not eligible to file under Chapter 7. Calculating disposable income for purposes of Chapter 7 is an intensive process, and it requires you to consider regional allowances (i.e., specific allowances for Marathon County, Wisconsin) for necessary expenses in addition to using appropriate calculations of your income, expenses, and allowable deductions.
When performing the means test, it is important to be as comprehensive and accurate as possible. Individuals wishing to file under Chapter 7 should not misrepresent their income or underestimate their expenses, and they must correctly determine the number of family members living in their household. Depending upon a person’s individual circumstances, the specific pieces of information required in order to complete the Chapter 7 means test may include (but are not limited to):
- Average monthly income based upon the prior 6 months
- Spouse’s average monthly income (and whether your spouse will also be filing for bankruptcy)
- Percentage of spouse’s income used to cover household expenses
- Uses of spousal income other than payment of household expenses
- Food, clothing, and other necessary expenses (based on IRS National Standards)
- Out-of-pocket health care costs (based on IRS National Standards)
- Housing, utility, and insurance costs
- Secured creditors and average monthly payments to each
- Vehicle ownership or lease and transportation expenses
- Taxes, deductions, life insurance, court-ordered payments, education and childcare expenses, telephone expenses, and other relevant allowances
Determining Your Best Option
Similar to the process of filing for bankruptcy, while it is possible to complete the Chapter 7 means test on your own, it is best to seek help from an experienced attorney. There are numerous factors to consider, and mistakes can prove to be costly. It is also important to determine whether filing under Chapter 7 is truly your best option or whether you may have other more-attractive bankruptcy or non-bankruptcy alternatives available.
Disclaimer: This Article Is Not Legal Advice
Never rely on an article for legal advice as the law frequently changes, information may not be accurate, there may be exceptions to a rule, and reliance may be detrimental. Always consult one of our experienced attorneys for competent, current, and accurate legal advice.
Schedule an Initial Bankruptcy Consultation in Wausau, WI
If you live in the Wausau, WI, area and are thinking about filing for bankruptcy under Chapter 7, we encourage you to contact us for an initial consultation. To discuss your options with one of our experienced bankruptcy attorneys in confidence, please call (715) 842-2291 or request an appointment online today.