Texas Chapter 7 Bankruptcy Income Limits

Though the cost of living in Texas is below average, there are many Texans who struggle to pay back their debts and have to file consumer bankruptcy. Chapter 7 bankruptcy allows debtors to discharge most of their unsecured debts, including credit card debt and medical bills. But not everyone qualifies to file Chapter 7 bankruptcy. This article explains the Chapter 7 means test and why it was implemented.

Qualifying for Chapter 7 Bankruptcy 

Filing Chapter 7 bankruptcy wipes away many consumer debts and gives you a financial fresh start. For the most part, you can discharge unsecured debts regardless of how much debt you have or why you acquired it. This created a fear that some people would abuse the Chapter 7 bankruptcy process.

To address this, Congress made changes to the U.S. Bankruptcy Code and the Chapter 7 eligibility rules. To determine if you have the income or “means” to repay at least some of your debt, you now have to pass a means test to file Chapter 7 bankruptcy. Despite this additional eligibility requirement, Chapter 7 bankruptcy is still readily accessible to many people who have unmanageable consumer debts. 

The Texas means test consists of two parts, but if you pass the first part, you don’t have to take the second. The first part compares your income to the median income for a comparable Texas household. If your current income falls below this income limit, you pass the means test and qualify to file Chapter 7 bankruptcy. 

If you fail this first part of the means test calculation because your income is too high, you can move on to the second part of the means test. The second part of the test looks at your typical monthly expenses and remaining disposable income. If your basic living expenses are too high in relation to your income, you’ll pass the full means test, and you can still file Chapter 7 bankruptcy. We’ll discuss this more below.

Median Income Test 

The first part of the Chapter 7 means test compares the filer’s household income to the median income for a similarly sized Texas household. Keep in mind that even if you’re filing bankruptcy as an individual, you’ll use your family income in the means test calculation. 

What is the state median income and where does this information come from? The U.S. Department of Justice, which uses data from the U.S. Census Bureau, creates charts with the median incomes for households of various sizes in Texas and all other states. You can see the Texas chart below. This income information is updated regularly, usually every six months. 

Median essentially means middle. So if you have a household of three, you’ll compare your income to the median income for a household of three. That means half of all households of that size earn less than the median and half earn more. According to the chart below, in real numbers, the median income for a household of three in Texas is $80,733 a year.

How To Calculate Income & Household Size 

The means test requires you to compare two numbers — the median income for a Texas household of the same size and your estimated yearly income. As a bankruptcy filer, you’ll calculate your estimated yearly income and determine your household size, which involves three steps.

Step 1: Look at your gross income from the past six full months for everyone in your household. Don’t count your current monthly income. Gross income is the amount you make before taxes or other deductions. For this test, you’ll want to include most forms of income. Add up wages, child and spousal support, retirement income, and unemployment benefits. But don’t include Social Security payments in this calculation.

Step 2: Take your total household income for the last six months and multiply it by two. This results in an estimate of your household’s yearly income.

Step 3: Calculate your household’s size. This is normally a simple task. You add up the number of people living in your home. But in certain situations, someone living under the same roof as you won’t be included as a part of your household. A common example is if you have a roommate who pays their portion of the rent or housing costs. In this scenario, your roommate isn’t considered part of your household.

Now that you have the size of your household, look at the annual income column in the median income chart below. Next, move down the column until you find the Texas household that’s the same size as yours. If the annual median income value from the chart is higher than your household’s estimated annual income, then you’ve passed the median income test. If the annual median income number from the chart is less than your household income, then you don’t pass the first part of the median income test. You may still qualify for Chapter 7 bankruptcy, but you need to complete the full means test to see.

Texas Median Income Levels

Texas Median Income Standards for Means Test for Cases Filed On or After May 1, 2022

Chapter 7 Means Test 

If you don’t pass the first part of the Chapter 7 means test because your income is too high, you’ll need to take the full means test. The full means test examines your basic living expenses, in addition to your income. If you earn a high income, but your living expenses are so high they leave almost no disposable income to pay off your debts, you may still be eligible to file bankruptcy under Chapter 7. 

When applying the full means test, the court will look at all of the filer’s financial obligations, including:

• Mortgage payments

• Car payments

• Utility bills

• Child support payments

• Alimony

• Food expenses

• Healthcare costs and medical bills

While you may keep a personal budget and know exactly how much you spend on each of your expenses, only some of your expense amounts in the means test will be the amount you actually spend. Other amounts are provided by the court. For instance, the filer’s basic food expenses are estimated by the U.S. Department of Justice. In essence, the court creates a budget using information provided by the filer and data from other sources. When creating this “budget,” there are several things to keep in mind.

If the court provides an amount for a particular expense, it’ll be based on your household size and where you live. The bigger your household and the higher the cost of living, the higher the estimated allowed expenses will be. Estimates vary based on the filer’s state. But given Texas’ size and varied living areas, some estimates are county-specific. Another consideration is that when creating this basic cost of living budget, the court won’t account for discretionary spending, such as entertainment. 

After you calculate your expenses, you can subtract them from your income to calculate how much disposable income, if any, you have. If you don’t have disposable income to pay your debts, then you’ll likely pass the full means test. If you earn enough to pay for your basic living expenses and make at least some debt payments, then you’re unlikely to pass the full means test or be eligible to file Chapter 7. 

If you aren’t eligible for Chapter 7 bankruptcy, you can file Chapter 13 bankruptcy instead. Chapter 13 takes longer than Chapter 7 and you’ll repay your debts over 3-5 years with a repayment plan. It can also be a good idea if you have a lot of secured debts.

Texas' Business Debt Exception 

The Chapter 7 means test helps decide eligibility to file a Chapter 7 bankruptcy petition. But this won’t apply if you’re looking to use Chapter 7 bankruptcy to discharge mostly business debts. If the business exception applies to you, then you can file Chapter 7 bankruptcy regardless of how much money you earn. The thought process is that bankruptcy law should provide more protection to people who borrow money to run a business by making it easier for them to get a financial fresh start if the business fails.

The Chapter 7 business debt exception allows filers to avoid having to take the means test if the debts to be discharged are business-related, and more than 50% of the debt you want to discharge is business-related. Business-related debt is debt incurred while trying to earn a profit as a commercial entity. If you use this exception, the court will scrutinize your bankruptcy petition closely to make sure the debts were in fact business debts.

Let's Summarize... 

The primary benefit of filing a Chapter 7 bankruptcy case is that it allows you to discharge many of your consumer debts. But to qualify for this, you must meet the financial requirements. One way to do this is to pass the median income test. Another way is to pass the full bankruptcy means test, which considers your complete financial situation, including your basic living expenses and your income.

If you can’t pass either test, Chapter 13 might be an option. But it’s more complicated than Chapter 7, so many filers contact an experienced Texas bankruptcy attorney for help. A bankruptcy lawyer can give legal advice on which chapter is best for your situation and whether bankruptcy is the best debt relief option for you. Many bankruptcy attorneys offer a free consultation.