Qualify for Chapter 7

In order to be eligible for a discharge of debts under Chapter 7 bankruptcy, your income available to repay your debts must be below a certain level. If your income is below median or average for your state, you are considered a below median debtor. This means there is no “presumption of abuse.”  If it is above median, you may qualify depending on your expenses and circumstances. Your documentation requirements may be more extensive, however. The time period that is used to determine whether you are above or below median is the six month period before you file, not counting the month of filing.

The simplest way to qualify for a Chapter 7 bankruptcy is to be able to prove that you are a below median debtor. This means that your family income is below average for the state of Texas.

Currently (as of March 15, 2011), the average income in the state of Texas is as follows:

Family Size Income Level
1 Person $38,294
2 Person $55,178
3 Person $56,445
4 Person $65,477

These amounts periodically change depending on census bureau data. Even if your income is higher than average (over median), you may still qualify for Chapter 7 if you have sufficient allowable expenses. You do have to itemize your expenses and the law determines what expenses you may use. Examples of expenses that tend to lower your income are a large house payment; large on-going medical expenses; motor vehicle loans; tax debt; domestic support obligations, such as child support or alimony; and charitable contributions. Do not automatically assume that because your income is over median, you do not qualify for Chapter 7 bankruptcy.

You may also still qualify if your income has recently changed and you will not be earning what you have in the past. If this is your situation, sometimes it is best to wait until a few months go by which lowers your average income for the look-back period. Depending on what factors are pressing you to file, such as tax garnishment, lawsuit, etc., timing the bankruptcy may be important. With the large number of layoffs, we are seeing more people who are laid off and on unemployment benefits, workers who are no longer receiving overtime or bonuses, and people who were high wage earners who are now unemployed or substantially underemployed.

If the majority of your debt is non-consumer debt, such as tax debt, business debt, debt owed on rental property, etc., you are not required to take the means test. You may still have to show, however, that going forward, you cannot afford to pay a substantial portion of your unsecured debt.

Consulting a knowledgeable, experienced bankruptcy attorney is critical. Pre-bankruptcy planning is often needed to maximize both your deductions and to make certain that all of your assets are protected. Most importantly, Chapter 7 bankruptcy is a big decision and has a major life impact. You want to obtain all of the available relief, and truly obtain a fresh start.

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