Can You File Bankruptcy If You Exceed the Median Income Limit?
No matter how dire your financial situation, there is no rule that says you must file for bankruptcy. But if filing is something you choose to do, then the type of bankruptcy you file will be largely determined by what is known as the means test.
We’ve gone into the details of the means test before on our blog. Briefly, the test determines whether a person’s income is low enough to qualify for debt liquidation through Chapter 7. It is designed to prevent abuse of the Chapter 7 remedy by people who actually have the financial ability to pay back some portion of their debts. You will need to go undergo means testing unless you qualify for a specific exemption, such as if most of your debt is business- or tax-related.
The first and usually the only step of the means test is to check whether your income is lower than the median income for a household of your size in your state of residence (or where you’ve lived for the majority of time for the six months prior to filing for bankruptcy). If your income is lower than the median, you qualify for Chapter 7.
But what if your income is higher? In that case, you’ll need to proceed to the second step of the means test, which is to deduct allowable living expenses from your income. These include food, clothing, housing, utilities, transportation and health care costs, based on IRS national and local standards. You can also deduct your actual average payments for child care, life insurance, taxes, mortgages and vehicle loans.
If your total allowed expenses equal or exceed your income, you have passed the means test. Otherwise, you have to take the next step, which is to determine whether you have enough disposable income to pay off at least part of your unsecured debts (such as medical bills). First, you subtract allowed expenses from total income and then you multiple that amount by 60 to arrive at your disposable income over the next five years. The results determine your eligibility as follows:
- If your disposable income is less than $7,700, you have satisfied the means test.
- If your disposable income is between $7,700 and $12,850, you may still meet the means test if you do not have enough disposable income to pay 25 percent of your nonpriority unsecured debt.
- If your disposable income is more than $12,850, you are presumptively disqualified from Chapter 7 but still may be able to file if you can demonstrate there are special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.
The Law Offices of James C. Zimmermann can help you work to satisfy the means test and then to initiate Chapter 7, Chapter 13 or another path to debt relief. To schedule a free initial consultation with our attorney, please call 973-764-1633 or contact us online. Our offices are conveniently located in Hackensack, Vernon, Wayne, Pompton Lakes and Nutley, New Jersey.