Considering filing for chapter 7 bankruptcy despite having a relatively high income? If your income is too high under what is called a “means test” calculation, a bankruptcy court could determine that your filing is abusive.
This post may need a bit of explanatory background. Chapter 7 bankruptcy is a type of bankruptcy proceeding in which the debtor’s nonexempt property is liquidated and sold, with the proceeds of the sale being used to satisfy creditors. Chapter 7 tends to be used by individuals rather than corporations, who might prefer to avoid liquidation and remain in business after the bankruptcy filing. With chapter 7 bankruptcy, unlike with chapter 13 bankruptcy, no repayment plan is made–creditors simply receive whatever proceeds are gained from the sale of property, and the debtor has no liability for any remaining debts. This means that if the debtor has few nonexempt assets, the debtor can go through chapter 7 bankruptcy and avoid making a substantial payment to creditors. (Of course, there are also downsides to chapter 7 as compared to chapter 13: for example, a repayment plan created under chapter 13 can save a debtor’s house from foreclosure.)
Means test calculation
The means test calculation refers to the process the court goes through to determine whether it is appropriate for you to be filing for bankruptcy under chapter 7, recognizing that it would be an abuse of the law to allow high-income debtors to avoid paying creditors despite having the future potential to do so. Assuming you are an individual with primarily consumer debts filing under chapter 7, you are required to complete a form which provides a statement on your current monthly income. “Current monthly income” has its own definition in the bankruptcy code; it means the average monthly income received over the six calendar months before commencement of the bankruptcy case, not including social security income or certain other payments. If your current monthly income is greater than the state median, the bankruptcy court will use your income information to perform a means test calculation. At present, the median income for a 2-person household in Minnesota is $63,101.
The means test calculation, which contains a frightening amount of math for most lawyers, states that the court must presume a chapter 7 filing is abusive if the debtor’s current monthly income reduced by certain amounts (in general, necessary living expenses) and multiplied by 60 is not less than the lesser of: (1) 25 percent of the debtor’s nonpriority unsecured claims, or $7,025, whichever is greater; or (2) $11,725 (though this amount is adjusted with time).
What if a filing is presumptively abusive?
If your income is high enough to trigger a presumption of abuse under the means test calculation, three things can happen. First, you may be able to overcome the presumption of abuse by showing special circumstances, such as a serious medical condition or upcoming service in the armed forces, that would affect your current monthly income. Second, the court may convert the filing to a chapter 13 filing and require you to pay any difference in fees. Finally, the court may simply dismiss the filing.