Am I Eligible for Chapter 7 Bankruptcy?
If you are filing for bankruptcy in Washington State, determining whether to file Chapter 7 or Chapter 13 will be the first and most important decision you have to make. Chapter 7 and Chapter 13 work very differently; with Chapter 7 resulting in a discharge of debts within several weeks of filing and Chapter 13 requiring repayment of debts as part of a 3-5 year repayment plan. While Chapter 7 has the benefit of allowing you to eliminate your obligation to repay eligible debts, not everyone is eligible to file for Chapter 7 bankruptcy.
Determining Eligibility for Chapter 7
Because of changes to the bankruptcy code that occurred in 2005, your eligibility to file for Chapter 7 bankruptcy is dependent upon the income that you earn. For those who live in Seattle, the first test of whether you can file for Chapter 7 is whether or not your income is above the median income in Washington State. This is determined by the size of your household. For example, in Washington as of 2011, the median income for a household with one family member was $51,671 while the median income for a household with four family members was $80,404. If your income is below this median income for a household of your size, you will qualify for chapter 7.
If your income is above the median, a determination of whether or not you are eligible becomes more complicated. In these situations, a “means test” is used which assesses whether you have the means to both pay for all of your required monthly expenses and also to pay something towards the creditors that you owe money to.
The Means Test
The means test involves adding up all of your income from sources such as:
- Your wages from an employer
- Income earned through a business
- Income from pensions or benefits programs
- Other monies paid into your house on a regular basis towards your household expenses or towards the support of a dependent
Once your income has been added up, you can subtract permitted expenses to determine your “disposable income” (the amount left over after expenses). Permitted expenses to subtract include:
- Monthly payments towards your rent or mortgage
- Required monthly payments towards car loans or transportation costs. In Washington, when you have no vehicles in your home, you have an allowance for transportation costs of $182. With a single vehicle, you have an allowance for this category of $236.
- Insurance and/or out-of-pocket health care costs
- Monthly taxes
- Required deductions from your paycheck
- Payment for a term life insurance policy
- Any payments required by the court such as child support or alimony payments
- The cost of educational expenses if such education is required for your job or if the expenses are paid towards the education of a disabled child
- Expenses for childcare
If your disposable income exceeds the level permitted and you have money left over to pay your debts after required expenses are paid, then you are not eligible for chapter 7 bankruptcy in Washington and you will need to file under another chapter of the bankruptcy code such as Chapter 11 or Chapter 13. An experienced Seattle bankruptcy attorney can assist you in understanding your options and in best determining how to proceed.