Bankruptcy: Income Limits on Filing Chapter 7 Cases

With the exception of certain debts, if you abide by the terms of your Chapter 13 payment plan, the court will generally order a discharge of your remaining debt following the expiration of your payment period. If, however, you violate the terms of your chapter 13 plan, the court may consider converting your case to a liquidation case—that is, a Chapter 7 bankruptcy case.

Chapter 7 Bankruptcy is the form of bankruptcy that typically comes to mind when you use the term. It is a liquidation—that is sale—of your nonexempt assets, possibly including your home. The money is then distributed in priority order to your creditors, and your remaining eligible debts are generally discharged thereafter. A Chapter 7 bankruptcy, unlike a Chapter 13 bankruptcy, does not require a payment plan, which is why petitioners with limited income will often elect to file for Chapter 7 bankruptcy and take advantage of the following specific New York asset exemptions:

• Homestead of as much as $165,000 depending on the county—this means you may be able to keep your home even after liquidation;
• Appliances, clothing, cookware, wedding rings, domestic animals, and certain personal property of as much as $1,100;
• Burial plots;
• Savings of as much as $600 and certain cash assets;
• Tools of your trade;
• Vehicles of as much as $4,000;
• Pension and public benefits;
• Alimony and child support; and
• Certain annuities.

When it comes to filing for Chapter 7 bankruptcy, choosing whether to use New York or federal exemptions and the limits thereto can prove complicated, and this generally requires the assistance of a New York individual bankruptcy attorney. However, because it allows for a variety of exemptions, Chapter 7 does not require a payment plan, and generally discharges your remaining debts, many debtors have abused it. For this reason, not every individual debtor qualifies to file for bankruptcy under Chapter 7.

History of Chapter 7 Bankruptcy

The ideological underpinnings of a debt-release “jubilee” date back to ancient times, and even appear in the U.S. Constitution. Over the years, bankruptcy law has undergone a multitude of changes to both adapt to an evolving financial world and prevent abuses.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, however, marked a major change in United States bankruptcy law. The biggest change that came out of the 2005 amendments was known as the “means test” in consumer bankruptcy cases. Before this test (which we will addressed later) was established, debtors could discharge debts nearly unconditionally while retaining their non-exempt assets. Declaring Chapter 13 bankruptcy, in which the debtor could choose to pay off certain creditors on a repayment plan, was actually voluntary, essentially based on an individual’s underlying morals.

The main purpose of the 2005 amendments was to curb abuse of the Chapter 7 system by debtors who could actually afford to pay at least some of their debts but elected not to do so. Courts now have the option of dismissing a Chapter 7 bankruptcy petition if they find that debtors have abused the system. In making an abuse determination, the “means test” is used to determine whether the debtor can afford to make certain payments to creditors—and as a result, is ineligible to file for a Chapter 7 bankruptcy. If the court determines that a debtor has sufficient means to pay certain creditors, the case may be converted to a Chapter 13 bankruptcy case.

Applying the “Means Test” to the Chapter 7 Debtor

Codified in 11 U.S.C. § 707, the court, on its own or via motion by the trustee or party in interest to the case, may dismiss/convert a Chapter 7 case if an individual’s debts are primarily consumer debts—that is, debts incurred for personal, family, or household purposes—and if the debtor has sufficient “means” to make certain payments. Enter the means test.

If the debtor’s monthly income exceeds the state median, about $60,000 in New York, the court is required to apply the test. In layperson’s terms, the means test takes the debtor’s current monthly income and subtracts the following allowable expenses up to a certain amount:

• Healthcare deductibles;
• Healthcare expenses, including dental and vision expenses provided they are required to maintain your body;
• Food;
• Housekeeping supplies;
• Clothing;
• Personal care;
• Mortgage or rent;
• Property taxes, interest, and insurance;
• Home repairs;
• Utilities, including your cell phone, internet, and cable up to a certain amount;
• Car payments and costs; and
• Certain miscellaneous payments, such as for life insurance, child support, child care, employment needs, and even charitable donations.