Determining Whether You Qualify For Chapter 7 Bankruptcy

In 2005, drastic changes were made to bankruptcy laws, creating the widely-believed myth that virtually nobody would qualify for Chapter 7 bankruptcy from then on. However, this is simply an urban legend. The truth is that in general, nearly anyone who could have filed for Chapter 7 bankruptcy in New Mexico prior to 2005 can still file now.

In order to qualify for bankruptcy filing, a person must pass one of two tests used to assess their financial situation: the “income test” or the “means test.” Here is a breakdown of each test:

The 6 Month Gross Income Test

An individual will qualify for Chapter 7 bankruptcy if the individual’s annual gross household income, which is twelve times the individual’s average gross income per month during the six month period before the month in which the individual will be filing for Chapter 7 bankruptcy, is less than the median household income per year in that individual’s home state. Another $6,900 should be added to the total for every additional person.

To determine whether you in fact do qualify for filing under this test, add the entirety of the gross income in your household for the six month period directly preceding the current calendar month. After you get this total, you will multiply it by two, and then compare the final number to the number for other households in your state.

New Mexico’s median household income numbers are as follows (this number constantly updates and is recent as of February 2014): $38,914 for a household size of 1, $49,538 for a household size of 2, $50,548 for a household size of 3, $55,184 for a household size of 4, and so on.

For example: Liz and Harry reside in Kansas and have three children. In October, they assess their gross income from all sources including each spouse’s earnings, bonuses, overtime, or even gambling winnings, for the months of April to September. That total comes out to $36,600. Liz and Harry multiply that number by two, producing an annual gross income of $73,200.

Liz and Harry then find that in the state of Kansas, the median annual income per household is approximately $78,500 for a four-member family. Because there are five people in Liz and Harry’s family, they add the $6,900 allowance for the fifth family member. This brings them to $76,731, which is below the median annual income for Kansas households. This means that Liz and Harry qualify to file for Chapter 7 bankruptcy.

Determining Your Gross Income

Total income for your household for the previous six calendar months           $_____________

Multiply  x       2

Your average annual income   =          $_____________

Once you’ve found your average annual income using the method above, you’ll need to compare it to the numbers for other households in your state. You can do so for free at www.legalconsumer.com, by clicking on the free means test calculator and entering your zip code.

By waiting, you may in fact qualify for filing later on. If your average income for the last six months is above that for your state but the amount of your income has recently decreased, waiting another month or so is an option. This waiting period could mean that your income calculation is then low enough to fall beneath your state’s median, and therefore qualify you to file for Chapter 7 bankruptcy.

The Means Test

You might still qualify to file for Chapter 7 even if your household income exceeds the household income median in your state, if you can pass the “means test.” This test requires that you demonstrate that after expenses and allowable deductions, you are left without money to satisfy your unsecured debts (meaning a debt that is not secured by particular collateral, like a credit card).

You can take the means test for free at www.legalconsumer.com. You will be asked to enter basic information regarding your gross income and your monthly expenses. If you pass the means test, you will qualify to file for Chapter 7 bankruptcy. If you do not pass, then a bankruptcy court would most likely find that you have a sufficient amount of funding to repay at least a portion of your debts, possibly by filing for Chapter 13 bankruptcy.

Actual Income and Expenses Test

Certain bankruptcy courts will require you to file for Chapter 13 rather than Chapter 7 even if you do pass the income test or the means test if the court determines that going forward your income will exceed your expenses by an amount greater than $200 per month. The court will base its determination on the same income and expense information that are required to be filed in every bankruptcy action.