Can I file bankruptcy? That’s easy, usually.
Many people believe that they have to have a certain number of debts or amount of debt to file bankruptcy. This is not true. Filing bankruptcy does not depend on your debt. For Chapter 7 liquidation bankruptcies, your income determines whether or not you can file.
If your income is under the state’s median average depending on family size, and you do not have the income to pay back your debts, then, yes, you can file Chapter 7 bankruptcy. Filing bankruptcy has nothing to do with the size of your debt load or the type of debt.
You cannot have received a bankruptcy discharge under Chapter 7 in a case filed within the last eight years, or under a Chapter 13 case filed within the last six years. However, if you paid at least 70% of your unsecured debts, then the six year time bar does not apply to previous Chapter 13 cases.
Also, you cannot have defrauded creditors. Bankruptcy can only be used by honest people. For example, if you have transferred assets to friends or family members, incurred debts for luxury items when you were broke, or misled lenders about your finances, the court will not grant you a discharge of your debts.
The fine print.
OK, we simplified this subject to make it more understandable. What if my income is near the state’s median average? How do I exactly compute my average income for the test?
You take the average of your gross income for the six calendar months preceding the calendar month in which you will file the bankruptcy petition. Multiply that average by 12. That figure must be under the state’s annual median average (which changes from time to time). The state’s median income average depends on your family size. Bigger families have larger median incomes. Call us for help on this. It can get complicated. For example, income for bankruptcy purposes is much broader than income for federal income tax purpose. Tax free income and gifts are counted as income for bankruptcy purposes.
Even if you flunk the median average income test, there is another test. This alternate test, sometimes referred to as the means test, is essentially a cash flow analysis based on IRS allowed living expenses, secured debt, and certain actual living expenses. This is very complicated and you definitely need professional advice. In fact, we rely on bankruptcy software to help us compute the means test, and it’s still complicated. However, if your income is above the state’s median average for your family size, having large mortgage payments and/or car payments will help you pass the means test. A large income without large secured debts will almost guarantee that you will flunk the means test and preclude you from filing Chapter 7. Court ordered child support obligations, a special needs child, or court ordered spousal support payments will also increase the odds that you will pass the means test.
Also, regardless of your secured debts, if your income is way, way over the state’s median average for your family size, even sizable secure debts will not help. Also, there comes a vague income level where, even if you pass the means test on account of sizable secured debt, the Trustee will contest your discharge on account of your income being so large. In those cases, you will be forced to file Chapter 13 instead.
If you cannot file Chapter 7 bankruptcy, a debtor can almost always file Chapter 13. The requirements for Chapter 13 are much more liberal.