9th Jun 2015
Oftentimes, discussions regarding declaring bankruptcy in Alabama center around whether it is the right decision, but the question that should be asked before that is whether it is even an option.
The two most common forms of bankruptcy for individuals are Chapter 7 and Chapter 13. The first focuses on liquidating damages while the latter is focused on reorganizing debt into a more manageable plan. Chapter 7 appeals to many because typically more debt is written off. However, to be eligible to file under Chapter 7, certain income requirements must be met.
Enter the means test. The means test is a test set out in 11 USC § 707 of the Bankruptcy Code designed to determine whether a person has the means to pay off their debts and, thus, better suited for Chapter 13 bankruptcy.
Monthly Income Compared with Region
The first inquiry in the test is whether a person’s income exceeds the median family income in their state. In Alabama, the median income is $42,041 for one earner, $50,614 for two people, $56,186 for three people, and $66,442 for a family of four. What about families with greater than four people? Add on $8,100 for each additional person. Those whose income is less than or equal to these amounts are eligible to file Chapter 7 bankruptcy.
For those who make more than these amounts, the inquiry continues and gets more complicated. The goal of the second stage of inquiry is to determine whether the debtor has enough disposable income remaining after paying off monthly expenses to pay off some of their unsecured debts.
Disposable Income Calculation
In calculating how much disposable income a person has, usually only those monthly expenses included on the IRS’ National Standards and Local Standards charts can be counted and only up to the amounts listed on those charts. For example, the National Standards lists food expenses as $315 per month (for one person). A debtor that honestly spends $500 per month on food can still only deduct $315 in calculating his or her monthly disposable income for purposes of the means test.
There are a few exceptions carved out where expenses beyond those on the standards charts can be considered. For example, the Bankruptcy Code specifically states that “reasonably necessary expenses incurred to maintain the safety of the debtor and the family of the debtor from family violence” can also be counted as monthly expense.
Disposable Income Analysis
Once disposable income is calculated, it must be analyzed to determine whether it is sufficient to pay off some debts. How the analysis is conducted is set out in black and white terms in the Bankruptcy Code. A debtor will generally be ineligible for Chapter 7 if their monthly disposable income multiplied by 60 is equal to or greater than: (1) the greater of $6,000 or 25% of the debtor’s unsecured non-priority debt; or (2) $10,000.
If your head is still spinning, or you have a general grasp and want to learn more, the bankruptcy attorney at Semmes Law are here to help. Contact us today to talk about your financial struggles and whether bankruptcy is the best option for you. Every case is different.