Individuals and business entities, including corporations, partnerships, limited liability companies, business trusts and certain associations, can file for Chapter 7 bankruptcy.
For individuals wishing to file for Chapter 7 bankruptcy, the bankruptcy process divides debtors into two (2) groups:
Individuals whose debts are not "primarily consumer debt", e.g., those whose debts are incurred for business. These persons can qualify to file for Chapter 7 bankruptcy protection rather easily subject to the Trustee's powers to liquidate the individual's assets for the benefit of unsecured creditors.
Individuals whose debts are "primarily consumer debt", e.g., those whose debts consist primarily of consumer debt such as home mortgages, personal credit cards, personal car loans, or personal bank loans. For these individuals, the bankruptcy process employs a "means test" designed to determine if his or her income is sufficiently limited to qualify to file under Chapter 7.
The vast majority of people who file for Chapter 7 bankruptcy are individuals whose debts are primarily consumer debts. Thus, most bankruptcy filers must pass a "means test", i.e., a mathematical formula part of the U.S. Bankruptcy Code that determines if one is eligible to file a Chapter 7 bankruptcy.
The first part of the means test essentially compares a prospective filer's income (as determined by how much income he made over the last six months only) with the median income in his or her state for a family of the same size.
As of December 2012, Virginia's median income for a household family size of one was $52,247, for a family household size of two, it was $64,593, for a family household size of three, it was $76,012, and for a family household size of four, it was $89,803. These figures frequently change with the passage of time so if you are interested in filing bankruptcy, make sure to check with a lawyer to learn the latest median income amounts.
If one's income is LESS than his state's median income for his same family size, he can file for Chapter 7 bankruptcy without a "presumption of abuse". No further calculations are needed; the means test is satisfied. This is often great news for clients.
As you can see, this is a rather complex area of law and you would be well advised to speak with a lawyer who is well trained in this area.
To speak generally, however, suffice it to say that if a higher income earner's projected disposable income over the next five years is less than $6,000.00, he could likely qualify to file a Chapter 7 bankruptcy.
If one’s projected disposable income over the next five years is greater than $10,000.00, a presumption generally arises that that individual is not eligible for a Chapter 7 bankruptcy and his Chapter 7 bankruptcy would have "a presumption of abuse", i.e., a term with special meaning under the Bankruptcy Code.
Where there is a presumption of abuse, the U.S. Trustee's Office and/or the Debtor’s creditors may have the right to file motions demanding the Debtor's Chapter 7 case be dismissed and/or converted to a Chapter 13 case.
The important thing to keep in mind when deciding if you wish to proceed under Chapter 7 is that you and your bankruptcy lawyer first determine if your debts are "primarily consumer debts", and if they are, determine with your lawyer if you can pass the "means test" to file a Chapter 7 bankruptcy.
Contact the Simpson Law Firm at (703) 548-3900 and talk to an attorney with over two decades of experience. We stand ready to learn your gross income for each of the last six (6) months and determine if you may qualify under the means test.