What are the Chapter 7 Bankruptcy Income Limits in 2020?

The Chapter 7 income limits were added in 2005 when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Since Chapter 7 bankruptcy doesn’t involve a repayment plan of any kind, Congress worried about an abuse of the bankruptcy process by filers who could afford to pay their debts. To prevent this, Congress added a credit counseling requirement for anyone filing any type of bankruptcy and set income limits for Chapter 7 relief. The bankruptcy means test calculation determines whether someone can afford to pay a portion of their consumer debts as part of a Chapter 13 bankruptcy. 

Not Everyone Is Subject To The Chapter 7 Income Limits

Exception for Non-Consumer Debt. If more than 50% of your debt is considered non-consumer debt, you’re automatically exempt from the means test calculation. Non-consumer debt is also called business debt because it’s incurred with a business or profit motive. If you’re not sure if you have business debt, consider speaking to a bankruptcy attorney about your situation and the types of debt you have. 

Exception for Qualifying Service Members and Veterans. Disabled veterans, reservists called to active duty and members of the national guard don't have to count compensation connected to their service as part of the bankruptcy means test. This protection was recently expanded when the HAVEN Act was passed by Congress. ^[1]

Anyone who qualifies for one of these exceptions to the bankruptcy income limits has to file Official Form 122A-1Supp instead of their bankruptcy means test form. This form, titled the Statement of Exemption from Presumption of Abuse Under § 707(b)(2), lets the bankruptcy court know that you’re not subject to the income limits. 

The Chapter 7 Income Limits and the Bankruptcy Means Test

The bankruptcy means test is a calculation laid out in the Bankruptcy Code. The starting point for this calculation is the state’s median household income. This median income can be considered part of the Chapter 7 income limits. If your household income is less than the median household income for the same household size, you make less than the income limits. You pass the Chapter 7 means test and qualify for Chapter 7 bankruptcy. 

If your household income is greater than the median, you may still qualify for Chapter 7 bankruptcy, if your household expenses under means test calculation don’t leave you with any disposable income. More on that in Part 2, below. 

Part 1 - Comparing your Household Income to the Median Income 

The first part of the means test compares your average income to the median household income for the same household size. The median income depends on the state you’re filing bankruptcy in. 

Determining the Median Income for your Household Size

The income limit for your state and household size is based on data from the Census Bureau and it changes multiple times per year. To find the most up-to-date information, go to the website for the United States Trustee (or UST) on means testing and choose the current option in the drop-down menu titled “Data Required for Completing the 122A Forms and the 122C Forms.” ^[2]

This will bring you to a new page on the Justice Department’s website that provides a link to the Median Family Income Based on State/Territory and Family Size provided by the Census Bureau. From there, you’ll be able to pull up a table showing median incomes, by household size, for each state.

Calculating your Current Monthly Income

Your current monthly income under the means test is based on your monthly income in the 6 months before your bankruptcy filing. This doesn’t include the month your bankruptcy case is filed in. For example, someone filing Chapter 7 bankruptcy in July calculates their current monthly income based on how much they earned from January 1 to June 30. 

Step 1: Add Up All Income From The Last 6 Months

Your monthly income is calculated by adding up all countable gross income you received in the 6 month period you’re using for your means test.  Gross income is not the same as your take-home income. It’s before taxes and other deductions are taken out. 

Countable income includes income from wages, alimony, child support, rental income, and any other money you receive on a regular basis. Social security income (SSI or SSDI) is not added when calculating your current monthly income. If your only source of household income is SSI or SSDI, you pass the Chapter 7 means test without having to do any math. 

Step 2: Divide Result By 6 

Once it’s all added together, divide the total by 6. The result is your current monthly income under the bankruptcy means test. If your income fluctuates from month-to-month, your current monthly income under the means test may surprise you. Remember, it’s an average taken over the last 6 months. If you received significant overtime pay, income from extra gig-work, or a bonus during the 6 months, your average monthly income will be higher than what you’re actually earning now. Similarly, if you were out of work for 4 out of the last 6 months before finding a new job, your average income under the means test will be much lower than what you’re making now.  

Step 3: Using Your Current Monthly Income To Determine Your Annual Income

Take your current monthly income as calculated and multiply it by 12. This is your annual income according to the means test calculation. Compare that number to the annual income for your household size in your state. 

If your annual income is less than the median, you pass the Chapter 7 means test. If your income is greater than the median household income, you’ve failed the first part of the means test. You may still be eligible to file Chapter 7 bankruptcy based on part 2 of the means test.

Part 2 - Comparing your Current Monthly Income to Your Household Expenses

The second part of the means test calculation determines whether you have any money left over after paying your monthly living expenses. If the answer is yes, you have disposable income. If you have a high disposable income, the Bankruptcy Code requires that you use it to pay down your debts in a Chapter 13 bankruptcy before you can get a bankruptcy discharge. 

Only Certain Expenses Are Considered

This is where things get very technical, as only some types of monthly expenses are taken into consideration, so hiring a bankruptcy lawyer can be useful. The purpose of these allowed deductions is to determine whether your income is enough to cover your living expenses and repayment of your debts. A bankruptcy lawyer can give you legal advice on what’s an allowed monthly expense and what isn’t. 

Expenses are Forward Looking

Your average monthly income is calculated by looking to the past. Your expenses, on the other hand, are forward-looking and based on your actual monthly expenses. If your old health care plan cost $600/mo. but you were able to switch to a cheaper plan for $300/mo., the means test calculation will show this as a $300/mo. expense. 

(1) Paycheck Deductions

Paycheck deductions for income taxes, social security, health insurance, disability insurance, term life insurance and health savings account expenses are considered allowed monthly expenses. The same is true for deductions you didn’t really have a choice over that are required as part of your employment. Examples include mandatory retirement contributions, union dues, and uniform costs. 

(2) Wage Garnishments

While it’s probably an involuntary deduction, a wage garnishment is not automatically allowed as an expense in the means test calculation. If the wage garnishment is the result of a lawsuit filed by a credit card company for an unsecured debt, the automatic stay stops that garnishment once your petition for bankruptcy relief is filed with the court. And, since the unsecured debt will be discharged, it’s not going to be an expense for you going forward. 

The only exception are garnishment orders in place to make monthly payments for ongoing child support or alimony obligations. These domestic support obligations are not dischargeable and will continue to be deducted from the filer’s paycheck. They are an allowed monthly expense. 

(3) Regular Living Expenses Are Based On National Standards

To make sure things are as fair as possible to everyone filing bankruptcy, there are limits. Otherwise, what’s to stop someone from spending $500 on new clothes and $800 on eating out every month? Excessive spending like that would surely leave no disposable income to pay creditors and shouldn’t be rewarded with almost instantaneous debt relief through Chapter 7 bankruptcy. 

To account for regional differences, some of these expenses are based on national standards, while others are based on local standards. Monthly expense allowances under these standards vary by household size. It’s broken out as follows: 

National Standards

• food (groceries and eating out)

• clothing and services (think dry cleaning)

• housekeeping supplies

• personal care (haircuts, for example)

• health care expenses

Local Standards

• utilities and housing maintenance

• mortgage or rent expenses

• transportation expense, including public transportation

• vehicle operating costs

(4) Actual Necessary Expenses

These are expenses that you actually pay every month that are not already accounted for in the local or national standards. If the United States Trustee in your district picks your case for an audit, you’ll be required to show documentation that you’re making these monthly payments. They include the following: 

• term life insurance for yourself

• education for employment that is a condition of your employment

• expenses incurred for the health or welfare of physically or mentally challenged child

• child care expenses, like babysitting, daycare, and preschool

• medical bills exceeding the national standards for health care expenses

• certain insurance premiums

• charitable contributions (up to 15% of gross income) 

(5) Ongoing Debt Payments: Secured and Priority Debts

If you have a car or house that you plan on keeping after filing bankruptcy, you’ll also keep the monthly payment on your car loan or mortgage. You can deduct the monthly payments for these secured debts, at least to the extent that they exceed the local and national standards. 

If you owe a tax debt that won’t be eliminated in your bankruptcy case, you’re able to deduct a monthly payment towards this priority debt as well. 

What’s Left After Allowed Monthly Expenses Determines Your Eligibility For Chapter 7 Bankruptcy 

If the number is negative after subtracting allowed living expenses from your monthly income, you don’t exceed the Chapter 7 income limits. You pass the means test and can proceed with filing for bankruptcy relief under Chapter 7.

If the result is a positive number, because your income exceeds the allowed expenses, you have disposable monthly income. If you’ve made it this far without a bankruptcy lawyer, keep in mind that  Chapter 7 and Chapter 13 provide different types of debt relief. Now may be the time to schedule a free consultation with a law firm in your area to learn more about the pros and cons of each.

If your disposable monthly income is less than a certain amount (adjusted every three years) when multiplied by 60, you meet the income limits. The means test calculation has determined that you don’t have the ability to repay a meaningful amount of your unsecured debts and you qualify for Chapter 7 bankruptcy. 

If you exceed the limit, it’s assumed that filing a Chapter 7 would be an abuse of the bankruptcy process. Chapter 7 bankruptcy relief may still be possible, but only if special circumstances exist. 

Let’s Summarize…

The means test is one of the most complicated bankruptcy forms. If the bankruptcy means test shows that your household income is less than the median household in your state, you pass the Chapter 7 means test. If your average income exceeds the median income, you may still be eligible for Chapter 7 bankruptcy based on the extended means test calculation.  

Below Median? 

If you’re below the median income, hiring a bankruptcy lawyer may not be affordable. If you need bankruptcy relief through Chapter 7, see if you’re eligible to use Upsolve’s web app to prepare your bankruptcy forms. It’s completely free and has already helped thousands file Chapter 7 bankruptcy without a lawyer.