While bankruptcy is the fastest way to legally eliminate typical consumer debts like credit cards and medical bills, not everyone can file Chapter 7 bankruptcy. In order to file a Chapter 7 petition, your income must be below the median income for your household size. The median income is determined at least annually by the United States Census Department. You can find current numbers here.
To calculate your income for Chapter 7 purposes, we need to know all of the before taxes income you and your spouse have gotten for the last six months. We have to include income from all sources except Social Security benefits. Once we have that number, we divide it by six to get your average monthly income. Then we multiply your average monthly income by twelve to get your annual income.
Your annual income must be below the median income for your household size. If it’s below that number, we can move on to calculating how your actual monthly after-tax income relates to your monthly allowable household expenses. Your monthly after-tax income shouldn’t exceed your monthly allowable expenses by more than $100.00. If it does, and we can’t find any other allowable expenses, you might get forced into a Chapter 13 bankruptcy.
If your annual income is above the median income, we have to proceed farther down the means test form (Form B22A) to determine whether Chapter 7 is still an option.
Here’s what the Chapter 7 means test looks like:
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The means test requires us to plug in your average before-tax monthly income. From there, we can start deducting certain allowable expenses. Those allowable expenses are generally dictated by the Bankruptcy Code and are based on IRS Data. You can find the allowable amounts for means test deductions on the United States Trustee’s website here.
We can deduct expenses for:
- Food, clothing, and other personal items like haircuts;
- Health care, including out of pocket costs as well as insurance premiums. Any health care expenses beyond the allowable amounts must be ongoing and documented;
- Non-rent or mortgage housing expenses, like gas, electric, water, trash, cable/satellite, cell phone. While these amounts are dictated IRS data, if you have extraordinary utilities expenses, and we can document them we can claim additional expenses; we can also deduct expressly for Internet access;
- Rent or mortgage amounts;
- Transportation – operating expenses like gas, maintenance, insurance;
- Transportation – ownership expense. This is allowed only if you are paying a loan on a vehicle. We can also deduct the cost of public transportation if you are using it;
- Income taxes;
- Involuntary deductions for employment such as union dues or required pension plans like PERA;
- Life insurance premiums;
- Court-ordered payments like child support or restitution;
- Education costs if they’re related to your job or getting a job;
- Childcare;
- Education expenses for children younger than 18;
As you can see, the allowable monthly deductions are fairly wide ranging. But completing the means test requires knowledge of case law and the Bankruptcy Code to know whether or not an expense can be deducted. Also, your household size can affect how much you can deduct. Who can be included in your household is part of our analysis. Once we have a full understanding of your income and expenses and complete the means test, we can tell you whether or not you can file Chapter 7 bankruptcy.
If you have questions about whether you qualify for Chapter 7 bankruptcy in Colorado, we hope you’ll come in for a free, no-obligation consultation with an experienced bankruptcy lawyer. You can make an appointment by calling 303.331.3403 or by using our online scheduling system.