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Can I file for Chapter 7 Bankruptcy?

 

For most people, there are two types of Bankruptcy, a Chapter 7 bankruptcy (fresh start) and Chapter 13 (wage-earner repayment plan). A Chapter 7 bankruptcy is generally preferred because it is a quicker, easier and less expensive form of bankruptcy. To qualify for Chapter 7 bankruptcy, you must pass a “Means Test.” The Means Test has three parts and can get complicated.

 

1st Test – Income vs. Household Size

However, most people qualify under the first part and never have to complete parts two or three. The first part only compares household income and household size. Income is based on all before-tax household income over the previous six months. This includes all wages, commissions, pension, child support, government assistance, unemployment, family support, etc…). Household size is based on the number of people sleeping under your roof. This can also get complicated if you share custody of children, or if you have adult children or other non-dependents living with you. You would need to consult with an attorney to determine your household size according to the bankruptcy laws.

 

In Arizona, if your average monthly income falls below your household size (see chart below) you will qualify to file for Chapter 7 bankruptcy protection.

CHAPTER 7 MEANS TEST (PART 1)

Total Household Income Compared To Household Size

Household Size

Monthly Income

Annual Income

1 Person

$3,522

$42,628

2 People

$4,741

$56,894

3 People

$5,172

$62,066

4 People

$5,788

$69,452

5 People

$6,363

$76,352

6 People

$6,938

$83,252

7 People

$7,513

$90,152

8 People

$8,088

$97,052

9 People

$8,663

$103,952

10 People

$9,238

$110,852

 

2nd Test – Allowable Expenses

If your income is too high, you may still qualify for Chapter 7 protection, but you must complete the second part of the “Means Test”. The second test looks at specific allowed household expenses to determine what kind of payment to make in a Chapter 13 repayment plan. After completing this second part, if you have little or no discretionary income to make payments, then you are allowed to file a Chapter 7 bankruptcy. If you have more than $150 in discretionary income you may be forced to file for Chapter 13 protection. A partial list of deductible expenses include: 1) taxes; 2) secure debts for home and vehicles; 3) child care expenses; 4) child support payments; 5) out-of-pocket medical expenses; 6) health and disability insurance; 7) regular charitable giving; 8) regular financial support of the elderly, chronic ill, and disabled; 9) educational expenses and/or tuition for minor children; 10) court-ordered payments. The second test is very complicated, and can’t really be described in a few paragraphs. You should consult an experienced bankruptcy attorney to perform this analysis properly and determine whether you qualify.

 

3rd Test – Special Circumstances

If you have too much discretionary income, you may still qualify under the third test (Special Circumstances). Under this test, you list all the special circumstances and their financial impact that justify you being allowed to file under Chapter 7. One example is a recent disability which has dramatically reduced household income. Another is a separated couple with two households and higher than normal expenses. A petition claiming special circumstances is really a request to the U.S. Trustee and possibly a Bankruptcy judge to override the normal income and expense guidelines and make an exception in your case. These requests are highly scrutinized. If the U.S. Trustee objects to your claim of special circumstances then your case would be reviewed before the Bankruptcy judge to decide whether to make an exception in your situation. If your request is denied, then you can convert your case to Chapter 13.