Income limits in Chapter 7 bankruptcies

Among the most common types of bankruptcies, chapter seven is considered the last option. This is because it is known as liquidation. Here, all your non exempt property are sold by the trustee to generate cash that will be distributed among the creditors based on priority. This priority is based on whether a debt is secure or unsecured.

However, how do you decide whether you have to file for chapter 13 (reconstruction of debt over a period of time) or chapter 7 (liquidation). Under the new bankruptcy law it is done by calculation of the individuals income. This is mostly done by the help of the means test. This means test revels whether a person can file for chapter chapter 13.

If the median income is low, then a person can file for chapter seven else he will have to file for chapter 13 wherein based on his income the debt amount is reconstructed and a person becomes liable to pay back the debt in installment over the period or five years (in some cases three years).

Earlier Abuse Prevention and Consumer Protection Act made in 2005 did not consider the income limit in case a person wanted to file under chapter 7. However, this changed with creation of the means test. This was done because the creditors believed that there was fraud happening in the debt forgiveness.

Chapter a limitation to the maximum allowable income. However, this varies from state to state as all have different median income. Only people earning below the median income of the state can qualify for the filing of bankruptcy under chapter 7.

This is basically done with the help of mean test. In case you fail to pass the means test there is another way by which you can file for chapter 7. In that case you need to average your monthly disposable income and multiply it by 60. If it is less than the total outstanding debt, then you are eligible to file under chapter 7. It is multiplied by 60 because it in months which is the normal time you are required to pay off the debt in case of chapter 13. This disposable income carries few deductions. Those deductions are subtracted from the income to get the gross disposable income.