To qualify for a Chapter 7 bankruptcy in Kentucky, a debtor must pass the “means test.” About 97% of all debtors qualify for a Chapter 7. The means test has two parts. In the first part, you automatically qualify if your income is below the average income for your household size.
In the second part, you are still eligible if your reasonable and necessary deductions from your income do not leave enough to make a meaningful Chapter 13 payment. If all you have leftover is 100 dollars per month after expenses, you do not have a significant Chapter 13 repayment to benefit creditors. So you can make more than the average income and still pass. The means test only forces the top 3% or so of wage-earners into Chapter 13. The means test averages your prior six months of income to calculate your annual income and qualify for a Chapter 7.
Chapter 7 has no debt limit. Only individuals can file a Chapter 13. Businesses cannot file a Chapter 13 and are limited to an 11 or 7. Chapter 13 has a 1.4 million dollar debt limit. But by filing an individual Chapter 7 or 13, your small business might not have to file bankruptcy.
Many small businesses can effectively reorganize if the owners file a Chapter 13 or 7. Both corporations and individuals may file Chapter 7. But only people who have less than 1.4 million in debt can file a Chapter 13.
The Bankruptcy “Means Test” • Qualifying for a Kentucky Chapter 7
There are times when there is a purpose for Chapter 13, such as catching up on a mortgage or managing student loans and income taxes, which are not dischargeable. But you should never be talked into a Chapter 13 just because the attorney makes more money from Chapter 13 than Chapter 7. The reasons to file Chapter 13 include the following:
- You may only file one Chapter 7 every eight years.
- Higher-income debtors with significant disposable incomes are required to repay.
- You need to protect a cosigner or keeping a property.
- You need to stop student loan or income tax collections and abusive interest and penalty charges.
The means test amounts you can earn and still qualify for Chapter 7 are adjusted four times each year. As an example, the table below shows the income levels in Kentucky and Indiana for May 2021. However, each county has different average incomes. Your income determination is from the prior six months of income divided by six and then multiplied by 12 to get the average annual income for the bankruptcy means test. By lowering your income temporarily, such as filing while you are unemployed, back to school, or on maternity leave, you might qualify for a Chapter 7.
To qualify, you can:
- Earn less than the amounts in the table directly below.
- Meet one of the exceptions.
- Or, your reasonable and necessary expenses leave you with no meaningful Chapter 13 payment.
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a⎆ Exceptions to the Means Test
The bankruptcy means test is only a presumption your filing is or isn’t filed in bad faith. Some facts, such as a sudden disability, may allow you to file a Chapter 7 even if you fail the means test. Sudden changes in circumstances may make Chapter 13 not be feasible. You only need to explain a reason that allows you to file, such as a recent retirement or sudden disability, to overcome this presumption. Your income being seasonable may also be an excellent reason to prove the means test should not be a basis for you to be denied filing as a Chapter 7.
If over 50% of your debt is the business debt, you qualify under the second portion of the means test. Veterans who incurred most of their debt in service are also excluded from the means test. Income from Social Security, Veterans benefits, and disability are also excluded from the means test but are used in the budget income and expenses part of the petition.
I have met some attorneys who brag 95% of their clients file Chapter 13. About 70% of the cases filed nationally are Chapter 7 cases. Chapter 13 pays an attorney about three times the average Chapter 7 fee.
Make certain Chapter 13 is what benefits you, not your attorney. I have seen attorneys include disability as income in the means test to ensure they earn the higher fee from Chapter 13 cases. A Chapter 13 must be affordable and serve your goals. At the same time, bankruptcy requires debtors to file in good faith and uses their best efforts to repay. If the disposable income is there, the debtor must file a Chapter 13.
⎆ What is allowed in Chapter 7 Budgets?
Even if your income is higher than the average family income, you may still pass the bankruptcy means test. You can still file Chapter 7 bankruptcy if, after deducting for reasonable and necessary expenses, there is only $150 or less in disposable income left or if what is left pays back little to unsecured non-priority creditors. Debtors often forget expenses such as their annual car tags or daycare expenses. You still have child support, car insurance, and daycare expenses, even if you have not been able to afford it recently.
You qualify for filing a Chapter 7 bankruptcy if your budget leaves very little or nothing to repay creditors in a Chapter 13 bankruptcy. Under the means test, the U.S. Trustee may challenge your Chapter 7 if he shows that you have sufficient disposable income to afford a Chapter 13 payment. But the U.S. Trustee generally doesn’t challenge a case filed initially as a Chapter 13 with later conversion to a Chapter 7 after the debtor makes reasonable efforts to make it work and shows that his budget no longer can afford Chapter 13.
You can download these often-overlooked expenses, and there is also a list of the typical costs for the average budget. You are allowed reasonable 401k contributions, 401k loan repayment, and charitable expenses. But they look at what expense history you had before filing. You can include private school deductions for a child with a disability if you have a history of these past expenses. You may need to document medical or other expenses that are unusually high. School lunches, vacations, taxes, kids’ school activities, repair and replacement of household goods, pet care, haircuts, grooming, and yard care are also necessary expenses people often overlook.
⎆ Other Consideration for the Means Test and your Budget
1. Chapter 13 can include business debts.
People with mom-and-pop businesses often file a Chapter 13 and include their business debts. This may essentially allow their company to restructure without filing an expensive Chapter 11. Chapter 11 has a 95% failure rate. Chapter 7s complete over 99% of the time, and Chapter 13 cases complete or convert to a Chapter 7 over 70% of the time. However, you can only file a Chapter 13 if the unsecured debt is less than $419,275 and the secured debts are less than $1,257,850 in 2020 due to 11 U.S.C. § 109(e). This amount also adjusts annually by the consumer price index, and congress may drastically increase the Chapter 13 debt limits in 2021.
2. Chapter 13 bankruptcy plans and modifications can be less expensive than Chapter 7.
Bankruptcy Court often approves Chapter 13 Bankruptcy plans which repay 10% or less to unsecured debts. If Chapter 13 strips your second mortgage, Chapter 13 may be cheaper than a 7. And Chapter 13 discharges more types of debt than Chapter 7. A Chapter 13 can lower the interest rate of your auto loan stretch out a car loan. If the auto loan is over 910 days old, it can strip the secured part of the car loan to the value of the auto.
The Louisville Bankruptcy Court requires you to file an annual budget if your Chapter 13 plan is less than 100%. If your income changes, your plan payment may decrease or increase. Most of the time, your plan payment lowers. Filing annual budgets is not usually a requirement in the Eastern District of Southern Indiana District. If your income falls, you might also be able to lower plan payments by supplying a budget with a simple motion to modify the plan for a lower payment.
Filing a Chapter 13 is often more affordable, has more significant benefits, and costs less than debt settlement. You also get the power of a federal judge’s court order. So, instead of begging the bank to accept a payment of 50% in the settlement, you can often force them to take 10% if that is all your budget can afford. A Chapter 13 Bankruptcy requires you to pay what disposable income you have based upon your budget but, that plan may repay zero to unsecured debts.
If you are thinking about filing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.