A bankruptcy is based on your gross income
Video Transcribed: Edward Kelley here at 188 Debtline, answering your bankruptcy questions. We are in this series, top five bankruptcy questions that I get from you and we’re all the way up to number two and this is a simple one, but an important one. Simply do I qualify for a chapter seven. So there’s two kinds of bankruptcies, well, personal debt or bankruptcies. Chapter seven, chapter 13 and I’m not going to talk about chapter 13 but if you make too much money to do a seven you still have the option of a 13 which is basically a payment plan for a number of years, generally five years if your income is too high, but in some cases you can do it for three years. And the chapter 13 provides you the ability to stop a foreclosure, stop a repossession, manage tax debts, do the loans, things like that.
But again, I’ll save that for, maybe I’ll do another series just about chapter 13. But let’s talk about qualifying for a seven. So number one, there’s an income cutoff. In 2005 there was a complete overhaul under George W. of the bankruptcy code and called the Bankruptcy Abuse Prevention Act. And that put in some cutoff margins and significantly reduced previous margins under which you’re allowed to file a chapter seven and over, which you’re not supposed to, although it’s not a hard line.
I can tell you, for example, right now, for one person, you know somewhere around 40,000. The way they’d come up with these numbers is based on IRS national standards for basically the poverty line for a household size. So when you’re trying to figure out if you qualify it, bear in mind, it’s based on your household, not just you. So for example, if you have four people in your household, you’re going to be getting pretty high up there in the income cutoff.
So if even if you make 45,000 a year, if you’ve got two kids and maybe a spouse who doesn’t work, you’re probably going to have no problem with the cutoff. Now, the other side of that is you’re supposed to take into account everyone’s income in the household. So that doesn’t apply if someone, for example, is a renter, isn’t really a member of your household course, then if they’re paying you rent, you know that’s income also that you need to take into account.
Just because someone’s a family member doesn’t automatically mean they’re a member of your household if they’re paying rent or paying their own bills and that can take them out of it. So I know a lot of people don’t want family members, they weren’t doing bankruptcy to have anything to do with it. But just bear in mind if they’re part of your household, they will need to submit their income information.
Although you can also then use their expenses. So you know, there’s a lot of strategy and planning you can do in terms of these guidelines. So although, you know, I would say among attorneys there’s perhaps a thought that this bankruptcy abuse prevention act just cut off the ability to do bankruptcies. I certainly don’t find that to be the case. There’s a great Exodus of attorneys from the field after that law was passed. But I still, I find it fairly reasonable and somewhat generous as to the IRS standards. You know, most people who need to do a bankruptcy are going to qualify for a chapter seven.
That covers the income qualifications. The other thing is you can’t have done a bankruptcy in the last eight years date of filing. So, this understandably is meant to prevent people from just using bankruptcy as a means to run up credit and get rid of it the eight years, it was a long enough period that generally if someone’s doing a second one it’s because they’ve found themselves in bad circumstances. Again, not because they’re trying to abuse the bankruptcy process.
So those are the main two requirements. So if you haven’t done a bankruptcy in eight years and you can look online as far as the IRS standards, you know, obviously not going to go through them all now and they’re based on your state and you know they are changed and updated somewhat regularly. But you can always look those up and kind of ballpark your gross income.
And that’s the last thing I’ll say. Bear in mind, the cutoff or a bankruptcy is based on your gross income. So this is not what you take home, not the amount of the check that you get from your employer, but the total that you ever see. Now it’s a little bit different for businesses as you can imagine because sometimes people come in and they are completely self-employed and we calculate that a little bit differently as far as the gross income.
And the other consideration is that social security benefits and certain other governmental benefits are not included in what this is called the means test determining whether you are eligible. That part of the bankruptcy is called the means test. And for purposes of the means test, social security, certain other governmental income is not considered. Now will be considered later in the bankruptcy in terms of what your disposable income is. And you’re not supposed to have much at all in order to be able to do a seven. But as far as being able to qualify and being okay to file under chapter seven don’t include social security, certain other benefits.
So hopefully that’s a good little overview of do I qualify for a chapter seven and I will be back soon with the number one question that you asked me. This is Edward Kelley at 188 Debtline.