Chapter 7 Eligibility: Means Test Deductions

Many people see a Chapter 7 bankruptcy as a comparatively easy way to discharge debts they cannot pay and get a clean start. But not everyone can qualify for Chapter 7 bankruptcy eligibility. Knowing who is eligible for a Chapter 7 bankruptcy depends on working with an experienced bankruptcy attorney who understands the income limits and how to use the means test deductions to help you qualify.

Chapter 7 Eligibility Criteria

There are 3 ways to meet Chapter 7 bankruptcy eligibility:

• Your non-consumer debt exceeds your consumer debt (such as business debts incurred by sole proprietors)
• Your income is lower than the state’s median average income based on your household’s size
• You are able to reduce your income sufficiently using means test deductions

For many people, this means the primary question is whether they earn more or less than the state median average income. As of May 2022, the most recent data on the Justice Department’s website, Connecticut’s median family income by family size is:

• $72,497 for an individual
• $94,528 for 2 people
• $108,409 for 3 people
• $137,128 for 4 people

Each additional person adds $9,900 to the median family income. If your family’s total income is less than the state median average income, then you may qualify to file a Chapter 7 bankruptcy.

Some forms of income, such as Social Security Insurance payments and retirement income do not count and do not have to be disclosed. If your income varies from month to month – such as if you are an entrepreneur or an independent contractor – you will need to take an average of your past 6 months of income (the “look back period”). Because of this, your Connecticut bankruptcy attorney may advise you to wait for a few months before filing, in order to take advantage of seasonal ebb and flow for your business, or, if you are a wage earner, to take advantage of other income fluctuations such as seasonal employment dips, periods of temporary unemployment, or to avoid bonuses from factoring into the look back period.

Bankruptcy Means Test Explanation

If you are "over-median", then hope for qualifying for Chapter 7 bankruptcy relief is not lost. We have had a great deal of success qualifying higher-earning clients for Chapter 7 using the "means test" calculation. This calculation allows you to deduct certain income from your current monthly income (“CMI”), to provide a theoretically objective calculation of how much money you should have to pay creditors after all your necessary expenses have been paid. This is called your Disposable Monthly Income (“DMI”).

Bankruptcy Means Test Deductions

As with the threshold median income analysis, the starting point is your family’s average gross monthly income for the look back period. This is then reduced by a combination of standard and actual expense deductions.

There are 4 categories of means test deductions used to calculate your DMI:

1. National standards
2. Local standards
3. Other necessary expenses
4. Additional expenses

Some of these deductions aren’t based on your actual out-of-pocket costs, but instead on IRS “standards.”

National Standards

The National Standards determine your deductions for food, clothing "and other items", and for out-of-pocket health care expenses (e.g., medical and dental expenses not reimbursed by insurance). Each deduction is multiplied by the number of people you could claim as exemptions on your federal income tax return, plus the number of any additional dependents you support. If you are a divorced or separated parent who supports a child you cannot claim as an exemption, you may nonetheless be entitled to claim that child for purposes of the means test. You are entitled to a higher out-of-pocket health care allowance for each person age 65 or older. Some of the standards are minimums: if your actual out-of-pocket healthcare expenses exceed the standard, you will be able to deduct the additional amount.

Local Standards

The Local Standards determine your minimum deductions for housing and utilities costs (including insurance and mortgage or rent) and transportation expenses. There are two types of transportation expenses, which vary with the number of vehicles you own or operate. You may claim an "operation expense" for each vehicle you own, even if there is no car loan or lease payment associated with the vehicle. You may also claim an "ownership or lease expense" for each vehicle for which you make loan or lease payments. The deductible payments must reflect a projected 60-month average, beginning on the date you file your bankruptcy petition.

Other Necessary Expenses and Additional Expense Deductions

Other deductions are based on your actual monthly expenses. These are categorized as Other Necessary Expenses (including taxes, involuntary payroll deductions, your own term life insurance premiums, court-ordered support payments, and childcare expenses), Additional Expense Deductions (including health and disability insurance, HSA expenses, educational expenses for children under 18 (subject to a cap), and continuing contributions to a religious or charitable organization) and Deductions For Debt Payments which are secured by property you own.

If your work requires you to contribute to a 401k retirement plan or pay other expenses – such as union dues – those can also become means test deductions in some cases. Having large deductions for things like a mortgage or car loan can help you be eligible to file Chapter 7 bankruptcy, even if you intend to surrender the home or vehicle rather than pay off the secured debt.

Get Help Determining Chapter 7 Eligibility from an Experienced Bankruptcy Attorney

The question of whether you are eligible to file a Chapter 7 bankruptcy isn’t easy or obvious for everyday consumers. If you are above Connecticut’s median family income, you should speak with an experienced bankruptcy attorney today to see if you can use the means test deductions to qualify and receive the relief available under a Chapter 7 bankruptcy. Even if you do qualify, Chapter 7 is not a “one size fits all” solution. Depending on your assets and available exemptions, Chapter 13 or a non-bankruptcy solution may be a better fit.

At Lawrence & Jurkiewicz, we can help you sort through your family’s income and expenses, and measure them against the national and local standards to see if you qualify. We will meet with you to review your financial circumstances and help you decide whether to file a Chapter 7 bankruptcy, or whether another solution will be more appropriate to your situation. We want to help you make the right decisions for you and your family. Please call (860) 264-1551 or contact us for a consultation.