This question is tricky in its simplicity. While almost every individual person is eligible to file a bankruptcy, the real consideration is eligibility for bankruptcy relief, which can vary from person-to-person. Most frequently, the question is "can I file a chapter 7 straight bankruptcy and obtain a fresh start with a discharge?"
Under the 2005 bankruptcy law, a statutory means test is used to determine what income the debtor should devote to repaying debts. Applicable both to chapter 7 and chapter 13, the means test first compares a debtor's household gross income to the North Carolina median, and if above that median, then applies series of expense allowances loosely associated with the debtor's actual expenses.
Frequently Asked Questions
Our frequently asked questions also address Means Testing:
An answer to the question of how changes in income impact bankruptcy first requires some background.
We need six or more months of pay stubs as part of determining your gross income over the last six months. It's also helpful to understand the exact paycheck deductions currently being made. A debtor's 6-month average current monthly income is computed for determining whether a debtor is above median household income, such that statutory means testing applies. If means testing applies, this average income is compared against expense allowances for determining formulaic ability to pay creditors. This ability to pay affects eligibility for chapter 7 and the required payment in chapter 13.
We have discussed Means Testing in the following posts on our bankruptcy blog:
Millions of Americans support charitable and religious organizations with financial gifts every year. For some time, Congress has articulated a public policy in favor of charitable giving. The best known example is the charitable income tax deduction, which has been around since the War Revenue Act of 1917. This public policy also led to the adoption of the Religious Liberty and Charitable Donation Act of 1998 and a follow-on Religious Liberty and Charitable Donation Clarification Act of 2006.
Many people have credit card debt, and many people file chapter 13 bankruptcy. But what about when there is credit card debt in chapter 13 bankruptcy? Chapter 13 plans are repayment plans, a fact that causes a good bit of uncertainty for people considering bankruptcy as a way to get out from burdensome credit card payments. This post explains the basics of how credit cards are treated in chapter 13, and explains why many chapter 13 plans provide no payment at all to credit card lenders.
The bankruptcy means test is important in multiple ways to bankruptcy filers. It can determine chapter 7 eligibility, and in chapter 13 can affect both plan duration and payments to creditors. The statistics used in means testing are updated periodically by publication of the United States Trustee. The newest numbers are valid for cases filed on or after May 1, 2012, and include a number of updates that will be positive for many debtors.
For chapter 7 debtors, statutory means testing applies to individuals above the state median income. The availability of means testing deductions determines the result of the statutory formula, and whether a given debtor can proceed in chapter 7. One means test deduction is for payments on secured debts due in the next 60 months. By this deduction, if a debtor has an expensive mortgage payment, that payment is accounted for in determining if any monthly income is available for unsecured creditors.
The United States Trustee publishes official means testing numbers, which are used to complete the bankruptcy means test. The practice is for the United States Trustee to publish new means testing numbers twice annually, reflecting changes in the underlying data obtained from the census bureau and the internal revenue service. A few weeks lay between the publication of the new numbers and their effectiveness on new bankruptcy cases filed thereafter. For example, the UST published on October 12, 2012 a new set of numbers to be effective on November 1.
The bankruptcy code at 11 USC 104 provides for the periodic adjustments of certain dollar figures in the bankruptcy code every 3 years to account for inflation. The next set of new figures will be effective April 1, 2013. Closer to that date, the courts will publish an official list of changes. However, the Consumer Price Index data needed for the adjustment is now available, so it is possible to predict what these adjustments will be.
The chapter 7 means test serves to limit eligibility to file chapter 7 bankruptcy, posing a problem for individuals with household income above the state median income and with expenses that don't fit well into the Congressionally-designed deduction system. Individual is primarily non-consumer debts don't have to take this means test at all.
The United States Trustee this month released the updated means testing figures to be used in bankruptcy cases filed on or after 11/1/2011. In North Carolina, the median income levels for households of 2, 3, and 4 people has declined from 3/15/2011 values. This is the third year in a row where these November median income values are lower than the March figure, and median household incomes for 2, 3, and 4 member households have not been at a lower amount since early 2008 in North Carolina.
The previous and new median income figures are as follows: