Find out whether you're eligible for Chapter 7
Chapter 7 bankruptcy, also known as liquidation bankruptcy or straight bankruptcy, is intended to give a fresh start to people with overwhelming debt. As such, a key part of the bankruptcy process is determining whether you really need it or whether you can afford to pay off at least some of your debts.
The means test is a challenging part of the process for many South Carolina debtors, but it's important to access your legal rights. Here's what you need to know.
There are two ways to pass the Chapter 7 means test
The first and most common way to pass the means test is to have a current household income that is lower than the median income for your family size. Note that this includes your whole household income, including your spouse's income, even if you are filing for bankruptcy individually.
As of this writing, the median household income for bankruptcy purposes in South Carolina is:
- $52,348 for a 1-person household
- $67,922 for a 2-person household
- $75,128 for a 3-person household
- $90,331 for a 4-person household
- Add $9,900 for each additional household member
These figures change approximately every six months. You can find the current figures on the Department of Justice website.
Most people who file for bankruptcy are below the median. However, if you are above the median, you may still be able to qualify by deducting certain expenses. For certain costs, such as food, gas, clothing, and utilities, you must use the IRS standard figures; for others, like your mortgage, car payment, health insurance, and taxes, you can fill in your actual costs. If your additional costs are high enough (for example, if your mortgage payment is very high relative to your income), you may be able to qualify for Chapter 7 even if you are above the median income.
If you don't pass the Chapter 7 means test, you may still be eligible to file for Chapter 13 bankruptcy. There is no "means test" for Chapter 13 — indeed, the challenge with Chapter 13 is proving that you have enough income to keep up with a repayment plan.
What counts as a "household unit" for the means test?
Depending on your living situation, the size of your household may not be as straightforward as it seems. A "household" is not necessarily a husband, wife, and 2.5 kids. Some of the situations where the means test can get tricky include:
- You have a roommate who contributes to certain living expenses (rent, utilities) and, therefore, might count as part of your "economic unit" even though they are neither a dependent nor a family member.
- You have a child over age 18 who is still living with you.
- You have a retired or disabled relative living with you.
- You have shared custody, and some members of your household are only with you some of the time.
Individual bankruptcy courts vary somewhat in how they measure household size. If you are filing bankruptcy in South Carolina, you want an attorney who is familiar with the procedures used in the United States Bankruptcy Court for the District of South Carolina.
What counts as "income" for the means test?
The bankruptcy code defines "income" as any amount of funds paid to you (the debtor), by an entity other than you, for your household expenses. That includes:
- Your salaried, hourly, and overtime income (W-2 income)
- Any 1099 income (such as freelance or contract work)
- Rental income
- State government benefits
- Child support and spousal support (alimony) you receive
- Dividends, interest, and royalties
- Pensions and retirement
- Net business income
- Annuities
- Unemployment insurance
- Workers' compensation
As mentioned above, the means test also includes your spouse's income (unless you are legally separated) and potentially other income from your household members as well.
However, certain types of payments are not included in your income for purposes of the means test, such as some types of Social Security and disability income. Any payments you received related to a national emergency (such as COVID-19 stimulus payments) also don't count.
Bankruptcy cases normally look at your income for the last six months and double it to get your annual income. However, the court has some discretion in cases where your income has significantly changed within the last six months. If you lost your high-paying job two months ago, for instance, your income for the four previous months may still be enough to take you over the median, but the court can take into account your much lower income going forward.
Passing or failing the means test is only one part of your bankruptcy case
Remember, passing the means test means that you can file for Chapter 7 bankruptcy; it doesn't guarantee that your bankruptcy will be granted. It's still possible for the court to determine that you have the means to pay off some of your debts and convert your case to Chapter 13 or dismiss it entirely.
In addition, just because you can file for Chapter 7 bankruptcy doesn't mean you should. Depending on your financial situation and the nature of your debts, it may still be in your interest to file for Chapter 13 instead. Ultimately, only a bankruptcy attorney can explain not only whether you can pass the means test but also whether it's in your interest to file Chapter 7. If you're considering bankruptcy, contact us today for a free consultation with a bankruptcy attorney at Benjamin R. Matthews & Associates.