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Thursday, November 1, 2018

Who is Eligible to File Bankruptcy?

I'm often asked about whether a particular person is eligible to file bankruptcy.  A lot of people think their income is too high.  There are a lot of misconceptions about the 2005 Bankruptcy Code revisions and their impact on an individual debtor's ability to file for bankruptcy reliefin particular, the so-called "means test."

In a nutshell, what Congress did was create an income/expense calculation that was supposed to coerce consumer debtors (it does not apply to debtors whose debts are primarily business-related) who are over a certain income threshold into filing a repayment plan under Chapter 13 of the Bankruptcy Code, instead of allowing them to discharge debts through a Chapter 7.

The resulting means test is a somewhat complicated mathematical exercise; but luckily, Congress also put in a few "safe harbors." The most common safe harbor provides that if you make less than the median income for your household size in your state of residence, then you don't have to go through the full means test calculation.  The United States Trustee's Office (the part of the U.S. Department of Justice responsible for oversight of  bankruptcy cases) has recently published revised median income figures, which are applicable for any bankruptcy case filed on or after April 1, 2019.  For Massachusetts, those figures are:
  • Household size of 1: $66,492
  • Household size of 2: $83,326
  • Household size of 3: $104,552
  • Household size of 4: $130,695
  • Add $9,000 for every household member over 4
If you are a Massachusetts resident considering a Chapter 7 bankruptcy and your total household income in the last 6 months is less than half the above figures (which are 12-month figures), you qualify for the median income safe harbor, and you will not have to worry about your Chapter 7 case being dismissed because you are over-income.

Even if you're over the safe harbor amount, you still may be able to satisfy the means test if you have enough qualifying expenses, or can otherwise demonstrate special circumstances justifying a departure from the standard test (like a recent drop in income).  Short of that, you could still file for bankruptcy under a different chapter of the Bankruptcy Code.  In short, bankruptcy remains an option for just about everyone.