- September 17, 2021
- Thomas Adam
- Bankruptcy
Congress changed our bankruptcy laws in 2005, making it harder for those with higher incomes to file for Chapter 7 bankruptcy. The intent was to force this group into a Chapter 13 bankruptcy, to at least partially pay their debts. The Chapter 7 means test for Florida is a formula determining whether you should get debt relief under Chapter 7. It looks at your income and many other factors to see if you’re able to pay your debts.
There’s no shame in declaring bankruptcy. It’s a legitimate way to start over financially that’s so important to our country and economy.
The U.S. Constitution specifically empowers Congress to develop bankruptcy laws. Job loss, a failing business, medical bills due an unexpected serious illness or accident, or a divorce can drag you down to the point that you can’t keep up.
What is Chapter 7 Bankruptcy?
A Chapter 7 bankruptcy case involves a trustee (appointed by the court) gathering, organizing and selling your nonexempt assets (generally things you don’t need to live or work). The proceeds would pay your creditors according to the U.S. Bankruptcy Code. If they’re not fully paid, or at all, that’s their problem, because the court, after the process ends, discharges you from responsibility for paying them.
What Happens if You Don’t Pass the Means Test Chapter 7?
Even if you “fail” this test, there’s only a presumption that you can afford to pay your bills. Our attorneys can overcome that presumption if we successfully argue to the court that the relief you need can only come from Chapter 7. If that’s not successful, you can file for Chapter 13 protection.
Chapter 13 bankruptcy allows people with stable incomes to develop a plan to fully or partially pay their debts. This would be in installments over three to five years. Whether your income is more or less than the state median doesn’t impact your ability to file. It does affect how much time you have to pay your debts. If it’s less than the median income, it will be for three years unless the court decides a longer period is justified. If it’s more, your plan will be for five years. In either case, creditors can’t start or continue their collection efforts during this time.
What is the Income Cut-Off for Chapter 7?
The income cut-off for Chapter 7 is generally the median income for a Florida family of the same size as yours. But there are many variables to this formula. If you earn more, that won’t necessarily prevent you from using Chapter 7.
How is the Chapter 7 Means Test Calculated?
To understand how the Chapter 7 means test is calculated, the analysis involves two parts. If you have a lower income, you won’t have to go through the second step. The first step is determining how your income compares to the median Florida income. If we lined up everyone’s income in Florida from least to most, the median would be in the middle. “Median” income is different than the “average” income.
Your gross household income is compared to the median household income for a family of the same size in the state. The U.S. Census Bureau determines this number and updates it several times a year. The formula considers:
- The relevant time frame: At issue is your income six months before filing bankruptcy. If you make more money during particular times of the year, you may want to time your filing so it’s within a six-month period of earning less money.
- Your sources of income: The formula includes your gross wages (what you earned before taxes and other deductions come out) and other income sources that can include alimony, child support, money received from others, profits from a business, unemployment benefits, and pension or retirement payments (but not Social Security retirement or disability benefits).
How Do You Pass the Chapter 7 Means Test?
After calculating your gross annual income based on the prior six months:
- Go to this Department of Justice web page, then to “Data Required for Completing the 122A Forms and the 122C Forms,” and choose the correct time frame that applies to you.
- Next, there will be a page with “Median Family Income Based on State/Territory and Family Size” as an option. Click on that, and it should take you to a chart with information on Florida’s median income based on family size.
If your income is below that figure, it’s below the median income, so you passed the Chapter 7 means test and can skip the rest of it.
Your Income May Be Only Part of the Story You Need to Tell
If you need to continue with the Chapter 7 means test calculations, the next step is to determine whether your expenses are so high that you can’t pay your debts. You need to state your costs to the court. The IRS sets some of these amounts and others are what you paid. If the results show you don’t have enough income left over to pay at least a quarter of your unsecured nonpriority debts (debts that don’t involve collateral and are considered less important than others) over five years, you may use Chapter 7.
These expenses include:
- Food
- Clothing
- Out-of-pocket healthcare expenses
- Housing
- Utilities
- Transportation
- Payments for secured loans and priority creditors (taxes, car loans, your mortgage)
- Child support
- Alimony
- Administrative expenses you’d pay if you filed for Chapter 13 protection.
The Chapter 7 Means Test Calculator for Florida Isn’t a Make-or-Break Issue if You Need Bankruptcy Protection
Chapter 7 bankruptcy may be the better choice for you, but if your income is too high you may be unable to use it. Not passing this test isn’t the end of the story if you need bankruptcy protection. You may just need to go with Plan B, a Chapter 13 filing.
The Adam Law Group can get you through this process, no matter the test’s outcome. If the result doesn’t go your way, we can ask the court to make an exception, or you could file under Chapter 13. Call us at 904-329-7249 so you can talk to a bankruptcy lawyer about what you need and how we can help. Your initial consultation is free.