Chapter 7 Bankruptcy Laws

Reform of Chapter 7 bankruptcy laws and income means testing

One of the most controversial reform provisions of Chapter 7 bankruptcy laws pertains to qualification. This new limitation is expected to force most debtors into Chapter 13. In the past, 2/3 of debtors filing chose Chapter 7.

As a starting point, the new Chapter 7 bankruptcy laws presume all debtors file Chapter 7 in bad-faith, with the intention of abusing creditors, unless meeting three new qualification tests. This test provides "if monthly income, reduced by expenses, multiplied by 60, is not less than the lesser of either (A)(1) the greater of 25 percent of general unsecured claims, or (A)(2)) $6,000, or (B) $10,000." Be prepared - the impact of this test is startling.

Chapter 7 Bankruptcy Law Means Testing Example

Assume that a married couple each receive minimum wage and create approximately $1,800 total combined income on a monthly basis. To apply the test, deduct $1,175 in expenses for two people ($716 living + $459 housing) according to the new schedule of "National Standards" adopted from the IRS. This calculation results in a presumed $625 in excess income considered available for payments to creditors.

The test then requires calculation of the total amount of all excess income available for creditors if filing Chapter 13 (60 months x $625) which results in a $37,500 test measure.

All three prongs of the test must be passed to qualify for Chapter 7:

Measuring the first requirement, Chapter 7 bankruptcy laws do not permit this couple to file unless owing more than $150,000 in general unsecured claims ($150,000 x 25% = $37,500 test measure). Notice, to make minimum payments on $150,000 in credit card debt would require approximately $2,625 per month ($150,000 x 21% per year, divided by 12 months) - approximately 150% of the couples total combined income.
Measuring the second new requirement, notice that a couple earning minimum wage exceed the maximum disposable income limit - by an astounding 625% - according to the $6000 portion of the new test.
Measuring the third requirement, the $37,500 test number also exceeds the maximum disposable income limit ($10,000 over 60 months) by an amazing 375%. To qualify, this couple could have no more than $1,341 in combined monthly income ($10,000 = ($1,341 income - $1,175 expenses) x 60 months) - a gross violation of minimum wage laws for full time employees.

Reform is here - the new National Standard for Chapter 7 bankruptcy law - in action. A couple earning minimum wage, while living far below the poverty level, is also presumed to file under Chapter 7 bankruptcy laws in bad-faith because of their excess disposable income.