When your debt becomes unmanageable, you may have legal options, like Chapter 7 bankruptcy, that can provide a fresh financial start. However, before you can file, you must qualify. Below, our Texas bankruptcy lawyers discuss the process of determining Chapter 7 eligibility, called the Texas bankruptcy means test.
If you are considering filing for bankruptcy in Texas, do not hesitate to contact our law office today. At Warren & Migliaccio, we have extensive experience and success in helping individuals and their families through the bankruptcy process. When financial hardship threatens you and your family’s well-being, we may be able to help you take control of your situation. Contact us online to get started.
How the “Means Test” Can Impact Filing for Bankruptcy in Texas
There are two types of personal bankruptcy in Texas: Chapter 7 and Chapter 13. Each of these bankruptcy options has unique qualifications, benefits, and disadvantages. The most direct impact of the means test is determining whether an individual can file for Chapter 7 bankruptcy or if they must proceed with Chapter 13 bankruptcy.
Chapter 7 bankruptcy is a liquidation bankruptcy. Under Chapter 7, non-exempt assets are liquidated to pay off as much debt as possible. Then, most of a person’s unsecured debt, such as credit card debt, medical debt, and personal loans, is discharged. However, to qualify for Chapter 7 bankruptcy, filers must prove they cannot repay their debts by passing the means test.
Chapter 13 bankruptcy is a reorganization bankruptcy. Under Chapter 13, a person reorganizes their debts and sets up a manageable payment plan to pay off their debts over three to five years. After the pay period is over, any remaining unsecured debt can be discharged. You can learn more about the difference between Chapter 7 and Chapter 13 bankruptcy on our blog.
What Is the Chapter 7 Means Test?
The Texas means test determines whether a person is eligible to file for Chapter 7 bankruptcy. Essentially, it evaluates whether someone cannot pay off their debts or has enough income to repay some or all of their debts through a structured repayment plan.
The means test limits the use of Chapter 7. The test ensures it is available only to those who truly cannot repay their unsecured creditors. The “truly cannot” is governed by the bankruptcy code through the means test as explained below.
How the Bankruptcy Means Test Works in Texas
You should first understand that you will not need to take the means test if you are filing for bankruptcy with your business. If you are considering personal bankruptcy, passing the means test is dependent on your annual income or your disposable income. One exception to this requirement is if the majority of your debt (over 50%) is considered business debt also referred to as non consumer debt. In this specific situation, you may not need to complete the means test.
We recommend working with an experienced Texas bankruptcy attorney to help you conduct the means test. An attorney can help you determine whether you pass the means test.
Median Income Comparison
The first part of the Texas means test for Chapter 7 involves an income comparison. First, you will need to figure out your annual income.
For the means test, income is comprehensive. It goes beyond the filer’s gross wages, salary, tips, bonuses, overtime, and commissions. It also encompasses the following:
- Spouse’s gross income
- Alimony and maintenance payments
- Child support payments
- Regular contributions from any source to household expenses, such as from an unmarried partner, family members, dependents, or roommates
- Net income from operating a profession, farm, or business income
- Rental income from rental property or other real property
- Interests, dividends, and royalties
- Certain unemployment income
- Certain pension or retirement income
- DOES NOT INCLUDE Social Security retirement benefits and Social Security disability insurance
Then, you must determine if your annual income is higher or lower than the median family income for a household of your size in Texas. The United States Department of Justice publishes updated data from the Census Bureau stating median household income for each state. Specifically, you will want to calculate your total income for the past 6 months and then take that amount and pro rate it to a full year. For example, if you determine that you made $27,000 in the past 6 months, you would prorate this an annual income of $54,000.
If, according to your household size, your income is less than the median income in Texas, then you will not need to go any further with the means test. You will automatically qualify to file and receive Chapter 7 bankruptcy relief.
However, what happens if your income is above the median income for your household in Texas? Even if your income exceeds the state median, it does not automatically disqualify you. Instead, you will have to take the next step of the means test to determine eligibility.
Disposable Income Analysis
The means test is not only based on your family income. If your income exceeds the median, you still may qualify for Chapter 7 bankruptcy if your expenses are significantly high when compared to your current monthly income.
The second consideration of the means test examines your disposable income. It involves determining your disposable income after subtracting certain monthly expenses from your monthly income. To qualify for Chapter 7 bankruptcy, you must show that you do not have enough disposable income to pay your debts.
Your eligibility will be based on the amount of allowed monthly expenses you have. For example, the Internal Revenue Service (IRS) sets an IRS national standard and local standard deduction amounts for certain basic living expenses. Local standard amounts vary by county.
The IRS allows deductions for many types of basic living expenses, including, but not limited to:
- Housekeeping supplies
- Apparel (this living expense includes clothing)
- Personal care products and services
- Out-of-pocket healthcare costs
- Housing and utility costs
- Transportation costs
- Life insurance
- Health insurance
The Means Test will also take into consideration specific debts that you may have, including, but not limited to:
- Secured Debt
- Child Support Obligations
- Spousal Maintenance Obligations
- Child Day Care Expenses
- Charitable Donations that you have historically made.
You subtract these expenses from your income, and the amount left is called your disposable income. If your disposable income over the next 60 months is negative or below a certain threshold, you may be eligible to file Chapter 7.
If it is determined that you have adequate disposable income to pay off part of your debts, you will not be able to file for Chapter 7. Instead, you may have to file for Chapter 13 or explore alternative debt resolution options.
Schedule a Consultation With Our Texas Bankruptcy Lawyers
Even if you qualify for Chapter 7 bankruptcy, it may not be in your best interest to proceed with it. Your best options depend on your unique financial situation. We recommend consulting with an experienced bankruptcy attorney from our firm about your case.
During a consultation, we can answer your bankruptcy law questions, discuss your situation, and determine your potential legal options for moving forward. Our legal advice can help you make informed decisions and choose the best course of action for your situation. Contact us online or call our office to schedule your consultation today.