Chapter 7 Means Test Explanation
Passing the means test can be considered a crucial part of filing Chapter 7 Bankruptcy in Arizona. You fill out a standard form that determines your typical monthly income. The test considers your household income unless you are officially separated, even if your spouse isn't filing with you.
This explains how the means test in Arizona determines your average monthly income. The average monthly income you received from all sources in the six months before filing for bankruptcy must be entered. Thus, if your filing date is September 15, consider the time frame from March 1 to August 31. Add up all your revenue and split it by six if it changed throughout those six months. Remember to mention if you and your spouse receive money from a rental property. Suppose you have nothing to report on a particular line; enter $0.
If your income varies, you may want to look at this average income calculator. It estimates your average monthly income and is specifically made for the Arizona means test.
Arizona Chapter 7 Bankruptcy Income Limit
Next, we will cover Arizona's Chapter 7 bankruptcy income limit as of November 1, 2024. It's important to remember that these numbers tend to change every six months or so. The data is arranged by household size and the corresponding median income. Here is the data:
| # of People | Annual Income |
|---|
| 1 | $68,887 |
| 2 | $83,027 |
| 3 | $99,961 |
| 4 | $110,040 |
| 5 | $119,940 |
| 6 | $129,840 |
| 7 | $139,740 |
| 8 | $149,640 |
| 9 | $159,540 |
One thing to note is that you may add $9,900 to the annual income limit for every additional household member.
What Is Considered Income?
The test does not encompass all forms of income. Disability and social security income, for instance, are not considered.
Some income is included in the bankruptcy means test in Arizona and consists of any consistent payments made by an individual other than the bankruptcy petitioner. These payments are intended to cover household expenses. Let's examine a few of the income streams that fit within this group:
- Salaried income: The amount you get paid each month.
- Spousal income: Your spouse's income is subject to challenge if you're in a joint case or aren't officially separated.
- Hourly and overtime pay: You can deduct any overtime you work.
- Net Rental Income: Any money you make from renting out real estate is included.
- Arizona government income: Your state payments are included on this list if you get any.
- Alimony and child support
- Royalties, Interest, and Dividends: funds from investments and entrepreneurial ventures
- Retirement and Pension Income
- Net business income: The money you make from your firm is included if you are the owner and operator.
- Payments for annuities
- Compensation for unemployment
- Benefits from Worker's Compensation
What Is Considered In Household Size?
How exactly is the household size determined? For example, your roommate is not counted as part of your household, but typically, your children, who you claim as dependents on your taxes, may be included.
In bankruptcy proceedings, the definition only pertains to all individuals financially connected within a single dwelling. This includes immediate family, dependents, and those who rely on or contribute to the household's resources. It usually goes by the saying “heads on beds,” and sometimes, the attorney may look at who is filed within your taxes, so be sure to seek counsel.
Timeframe of Filing Another Bankruptcy
If you filed for bankruptcy in the past and are looking to file again, be sure that the appropriate amount of time has passed. Before you file another chapter of bankruptcy, you may have to wait a few years. Check out the timeframe below:
Chapter Filed Earlier, Chapter to be Filed, Time Restriction
- Chapter 13, Chapter 13, 2 years between filing
- Chapter 7, Chapter 13, 4 years between filing
- Chapter 13, Chapter 7, 6 years between filing
- Chapter 7, Chapter 7, 8 years between filing
Arizona Above Median Bankruptcy Means Test
If it looks like your income is higher than the household income level for Arizona, that doesn't mean you're automatically disqualified. There are two more means test forms that you can use to see if you still qualify for Chapter 7 bankruptcy.
The first form is called the "Statement of Exemption from Presumption of Abuse Under §707(b)(2)." It helps you show that even though your income is high, you still have valid reasons for seeking bankruptcy protection.
The second form is the "Chapter 7 Means Test Calculation." This allows you to deduct your allowable monthly expenses from your current income. Doing this lets you determine your disposable income and the amount left after paying for your expenses.
The expenses used in this calculation are a mix of national and Arizona expenses. So, it considers the specific cost of living in your state.
Note: disposable income is the money you have available to repay your debts after covering your expenses. If your disposable income falls below a certain amount, you might still be eligible for Chapter 7 bankruptcy.
That being said, you can take our Chapter 7 Arizona Bankruptcy Calculator to estimate your initial qualification before those specific deductions:
Allowable deductible expenses
You can subtract certain actual expenses from your income on the second part of the test. These include:
- Mandatory employment deductions like union dues, retirement plans, and uniforms.
- Health and disability insurance premiums.
- Income taxes.
- Child care.
- Term life insurance premiums
- Secured debt payments for your car and home
- Alimony and child support payments
- Charitable contributions, but they're limited to a percentage of your income.
You can check out the current national standards to determine the maximum allowed for these expenses. However, remember that these deductions have limits based on the number of people in your household. These expenses include:
- Housekeeping supplies
- Clothing expenses
- Food expenses
- Personal care services and products
- Housing and utility expenses
- Transportation expenses
- Out-of-pocket healthcare expenses
If you're unsure how your situation fits this criteria, contacting a local bankruptcy attorney in Arizona may be helpful. They can give you a free evaluation and help you navigate the process. You can find one right here.
What Happens If You Fail the Bankruptcy Means Test?
Some options to consider include Chapter 13 bankruptcy, debt settlement, debt management, or debt payoff planning.
Chapter 13 Bankruptcy
There is still a chance to obtain some debt relief through Chapter 13 bankruptcy if your income exceeds the threshold for Chapter 7 bankruptcy. A Chapter 13 bankruptcy in Arizona enables you to reorganize your obligations into a monthly payment schedule that is easier to handle. With this reorganization, you can avoid foreclosure, keep your house and cars, and not have your possessions taken back. In addition, you may be eligible for a reduction in any arrears for vehicle loans, alimony, and child support.
However, with Chapter 13, failing the means test means you do not have enough disposable income to pay the bankruptcy trustee at the end of each month. Because of this, the court cannot grant you a Chapter 13 bankruptcy, which may require sizable monthly payments.
Now, why would someone choose Chapter 13 over Chapter 7 bankruptcy? Some individuals go for Chapter 13 if they have more equity than what's allowed under the Florida bankruptcy exemption. It's a way to protect their assets while dealing with their debts.
Debt Settlement
In debt settlement, you could save money in the long term as the settlement company negotiates a reduced amount on your overall debt. For example, if you had $50,000 in debt, debt settlement might bring that down to $25,000. However, it's crucial to consider the potential impact on your credit score.
Debt settlement usually involves a payment plan that can stretch anywhere from 12 to 60 months and be cheaper than Chapter 13 bankruptcy. Remember that many debt settlement firms are national, so you don't necessarily have to find one that is local to Florida.
When choosing a debt settlement company, you have to be careful. Some companies charge around 25% or more of your enrolled debt. So, make sure you do your research before diving in. You can check out the Consumer Finance Protection Bureau for the latest information on debt settlement programs.
Cons of Debt Settlement
This option has some potential negatives, namely that you may have to miss a few payments for your creditors to be willing to negotiate. Not only does this put you at risk of being sued by the creditor, but it also impacts your credit score for up to seven years.
Additionally, there is no legal protection, so if a creditor does not agree to a negotiated payment plan, they may sue you. If a creditor sues you, that may go on your credit report.
There are also potential taxes on the forgiven debt. Whatever debt was forgiven in the settlement may be taxable, and you have to report the canceled debt on your tax return for the year it was canceled. Generally, you may have to report any taxable amount of canceled debt as income. The creditor may send you a 1099-C form you would have to fill out.
Debt Management
Debt management firms aim to minimize your interest rates, while debt settlement companies try to reduce the overall amount of debt you owe. These programs are often more expensive than debt settlement and have three to five years duration. Furthermore, not every creditor could be open to working with a debt management business.
However, this alternative may lower your interest rate by around 10–20% if you have a lot of high-interest credit card debt. This might eventually result in savings of between 30 and 50 percent on the amount you already owe, and it will also enable you to pay off your bills more quickly. The pro of this program is that it may allow you to pay into the principal rather than the increasing interest.
The downside to this option is that you still have to pay off everything you owe, so it may be a more expensive option. The good news is that it won’t hurt your credit as much as some of the other options may. However, the accounts in the program will close, which may take a small hit on your credit.
Many debt management firms are national, so you don't have to stress about finding a local one if you live in Florida.
Summary
Many opt for Chapter 7 due to its cost-effectiveness compared to other debt-relief options. The means test evaluates how your household income stacks against the Arizona income limit, considering various exclusions.
If your household income exceeds the limit, don't worry because qualifying for Chapter 7 in Arizona isn't solely dependent on income; your expenses and deductions also play a significant role. After considering these factors, you may still be eligible for relief under Chapter 7.
Alternative paths to explore include Chapter 13 bankruptcy, debt settlement, or debt management. Each option presents its own set of considerations and potential solutions, offering reassurance that there's always a way forward, no matter the outcome of the means test.
