Are you eligible for a Chapter 7 Bankruptcy? IRS announces new median income levels.

Consumers looking to file a Chapter 7 bankruptcy may be aware that they must pass certain income requirements in order to qualify for the bankruptcy. But what are these requirements, and would you know whether you qualify?

Means Testing

With the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, congress created a standardized test to determine income eligibility to file a Chapter 7 bankruptcy.  The test is designed to identify whether you have the means to repay some or all of your creditors.  Those who do not qualify for a Chapter 7 based on income, likely can still file a Chapter 13 bankruptcy to get relief from their debts.

Do I qualify for a Chapter 7 Bankruptcy?

Those looking to determine their eligibility to file a Chapter 7 bankruptcy should first compare their gross income to their state’s median income for the same household size. Those with a gross income below the state’s median qualify for a Chapter 7; those with income above the state’s median must complete a standardized form (means testing) to determine eligibility to file a Chapter 7.

The Internal Revenue Service recently released new median income figures.  These new figures will apply for cases filed after November 1, 2011. Not surprisingly, the median income figures for Oregon have dropped since the last revision was made in March of 2011. The median income level for an individual has dropped from $44,707 to $42,877, while the median income level for a family of four has dropped from $72,767 to $66,616.

What if I make too much money?

Even if you believe that your income is above the state’s median income, you may still qualify for a Chapter 7 bankruptcy. The standardized form used for means testing allows you to reduce your gross income by some of your monthly expenses.  In part, the amount that you are allowed to deduct comes from figures established by the IRS. Some of these figures are based on national standards (such as food, clothing and health care expenses) while others are county-specific (such as local housing and utility costs).  Like the median income level, most Oregon counties have seen a drop in the average utility expenses. In Multnomah County for example, the utility expense for an individual was $415, but beginning November 1st, will drop to $386. However, the standards for a mortgage payment or rent have increased.  For an individual in Multnomah County, the average rent or mortgage expense has gone from $873 to $1,169.

What do all of these changes mean for a consumer needing to file a bankruptcy?

While the drop in the state’s median income level may make qualifying for a Chapter 7 bankruptcy more difficult for some Oregonians, we do not expect the changes to have a drastic impact on those qualifying for bankruptcy relief through Chapter 7. For those who may no longer qualify for a Chapter 7, you can still seek bankruptcy relief through a Chapter 13. Both chapters of bankruptcy will give you relief from debt, collection calls and garnishment.

This article was intended to provide basic information regarding the new IRS standards. Determining eligibility for bankruptcy based upon income is one of many factors that must be considered when deciding if, when, and what chapter of bankruptcy to file.  This article is not a substitution for a consultation with an attorney who can review your individualized situation and help you to create a comprehensive plan for debt relief.

Eblen Freed LLP offers free bankruptcy consultations.  Contact us if you’d like to find out more.

 

 

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