You may be experiencing unemployment and deciding what to do next. Bankruptcy may be a great option, and it can be a common option for people in financial hardship to file. You have options, so in this article, we will provide more specific information about filing for bankruptcy and alternative options after being unemployed.
Feel free to take the quiz below to know which option may be best for you.
When you file for Chapter 7, you must meet income qualifications. When Congress changed the bankruptcy laws in 2005, it included an income requirement for Chapter 7 debtors (individuals who file for bankruptcy relief). Typically, debtors who do not meet the income requirements do not qualify for a bankruptcy discharge (debt forgiveness) under Chapter 7. Individuals with higher income levels typically must file a repayment plan under Chapter 13 to get rid of debts in bankruptcy. That said, asking whether it is better to file a Chapter 7 or Chapter 13 is a very good question to ask.
However, individuals who are unemployed or had a reduction in income might now qualify for Chapter 7, even though they may not have qualified for Chapter 7 before. The Means Test used in Chapter 7 cases measures your income during the six months before filing a Chapter 7 bankruptcy case. Therefore, if you have a reduction in income because you are out of work during the coronavirus pandemic, your income level may drop below the level required to receive a bankruptcy discharge under Chapter 7.
The calculator below will help you estimate your Chapter 7 cost and qualification based on your zip code.
To file for bankruptcy relief, you must complete a bankruptcy form called the Means Test. The Means Test calculates your average income and compares it to the average income for households in your state. If you have four members of your household, your income is compared to the average income for a household of four in your state.
If your average income is higher than the median income for your state, you “fail” the Means Test and may not qualify for debt forgiveness under Chapter 7. Each state has different median income levels based on data gathered from the U.S. Census Bureau and the Internal Revenue Service. The figures are updated every few months to ensure that the income levels reflect current median income levels for each state. The most recent median income and household size by your state for filing on or after May 15, 2022, can be found here.
To calculate your median income for the Means Test, multiply your average monthly income (current monthly income) by 12. The Means Test has two sections. You could “pass” the second section of the Means Test to qualify for Chapter 7 even if your median income is above the state median income. We discuss the second section of the Means Test below.
Average or current monthly income includes all income received during the six months before filing for bankruptcy relief. Therefore, if you file a Chapter 7 bankruptcy petition on June 10, 2022, you must include household income received from December 1, 2011, through May 31, 2022. Add all income during those six months and divide the total by six to calculate your average or current monthly income (CMI).
All income must be included when calculating your current monthly income or average monthly income except for income received under the Social Security Act (i.e. Social Security, SSI, and SSDI benefits) or payments received by victims of war crimes or terrorism. Use gross income when calculating average monthly income, except for income received from rents or the operation of a business, profession, or farm. For rents and business income, you use the net income reported to the IRS after deducting necessary business expenses. Examples of income used to calculate the Means Test include, but are not limited to:
The Chapter 7 Means Test is comprised of the following bankruptcy forms: 1) Chapter 7 Statement of Your Current Monthly Income 2) Statement of Exemption from Presumption of Abuse Under §707(b)(2) 3) Chapter 7 Means Test Calculation. Many people only need to take the first form, but we will walk you through everything to make sure it's clear as it took us a long time to figure this out. First, you should know what your income is in bankruptcy terms. You may want to take the following calculator first to help.
Here's how the bankruptcy form expresses average income: "Fill in the average monthly income that you received from all sources, derived during the 6 full months before you file this bankruptcy case. 11 U.S.C. § 101(10A). For example, if you are filing on September 15, the 6-month period would be March 1 through August 31. If the amount of your monthly income varied during the 6 months, add the income for all 6 months and divide the total by 6. Fill in the result. Do not include any income amount more than once. For example, if both spouses own the same rental property, put the income from that property in one column only. If you have nothing to report for any line, write $0 in the space." That's complicated. We built the calculator below to help.
You can use the following Statement of Current Monthly Income below using the bankruptcy form to help you estimate your Chapter 7 qualification. The calculator is specialized for your state as we take all of the income limits for Chapter 7 bankruptcy for every state.
If your median income is above the median income for your state, you might still qualify for forgiveness of debt in Chapter 7 by completing the second section of the Means Test. Thankfully, we also built a calculator that covers these scenarios as well in case you make too much based on the above calculator.
Chapter 7 Above Median Calculator
The second part of the Means Test above calculates your disposable income. Disposable income is the money you have left over each month after paying allowable living expenses. Examples of deductions include, but are not limited to:
After deducting your allowable living expenses from your average monthly income, if the figure is negative or zero, you “pass” the Means Test. If your disposable income is below a certain amount, you can also pass the Means Test and file under Chapter 7. If you are unsure whether you qualify for Chapter 7, you can use the free Chapter 7 Means Test Calculator to estimate.
If your debts are primarily business debts or you have provided certain homeland defense or military services, you might not be required to meet the income requirements of the Means Test to file under Chapter 7. We have built this functionality in the above-median calculator above, but please reach out to us if you have any questions.
If you want to explore Chapter 7 in greater detail, several resources can help. You can check the Chapter 7 Bankruptcy Process to understand how the process works and also take a means test calculator to estimate your qualifications. You may want to review Chapter 7 Bankruptcy Pros and Cons. The goal is for you to be most informed about your options and the pros and cons of your options,
The answer is ultimately your decision, but let's discuss some things to consider.
Even though you might qualify for Chapter 7 because of unemployment, there are some things to consider before filing Chapter 7.
If you can avoid filing bankruptcy, that might be the best choice for your financial well-being. A Chapter 7 bankruptcy remains on your credit report for 10 years, which could impact your finances long after the financial hardship ends. For example, the first question you may ask is whether you qualify for unemployment. For this, you can take an unemployment calculator to estimate your weekly benefit amount, duration, and qualification.
Many creditors are working with individuals who cannot pay their bills. Check with your creditors to see if you can pay partial payments or defer payments. However, make sure you understand the risks. Will these payments be due in one lump sum in a few months? Will you have the money to pay a lump sum to catch up on payments?
If you have not filed your income tax refund, now might be a good time to do so if you are expecting a tax refund. Prepare your tax return to determine whether you are entitled to a tax refund. If you owe, you can take advantage of the extension to file tax returns to delay the payment.
Although bankruptcy may offer a viable option for many, there are alternatives to bankruptcy to consider. Debt consolidation is one way to avoid filing bankruptcy. Also, debt settlement can give you the relief you need without filing bankruptcy, but just be wary of the debt settlement option.
Ascend has numerous resources and tools you can explore as you develop a plan to deal with debt problems caused by the coronavirus pandemic. If you need additional help or have questions, contact us online or call us at 310-307-5134. You can also take the free bankruptcy calculator below.
Bankruptcy can be a great way to get a fresh start when your debt has become unaffordable due to financial hardship. Bankruptcy is for those who have a strong desire to pay their bills, but may not have the ability to pay those bills.
Read storyTrying to figure out if you can meet all the requirements for a bankruptcy discharge can be a challenge, especially if you don’t know where to start. The Bankruptcy Means Test form was created to help you navigate through to see if you qualify to file for bankruptcy discharge. The means test will look at your income to determine if you can qualify.
Read storyThe United States Bankruptcy Code does not require people to hire a bankruptcy lawyer to file a Chapter 7 bankruptcy case. Cases filed by individuals without attorneys are referred to as “pro se” filings.
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