Chapter 7 bankruptcy offers debtors serious relief. In a chapter 7 bankruptcy, you surrender non-exempt property to the court. That property is sold and used to pay your creditors. The rest of your unsecured debts are then discharged. Most debtors don’t have any non-exempt property, so they don’t have to give up property. That means their debts are wiped out for pennies on the dollar.
Because chapter 7 wipes out debts and often doesn’t cost debtors anything, it’s reserved for those who truly need it. Those who don’t qualify for chapter 7 bankruptcy will need to file under chapter 13 instead. The test for whether you qualify to file under chapter 7 depends on your income and expenses, compared to certain national and local standards. Those standards change every year in May, so we’re updating you on the newest ones. These numbers apply to cases filed in Ohio on or after May 15, 2015.
1. Median Income Comparison
The first test for whether you qualify for chapter 7 is a comparison of your income over the past six months to the state median income. So, you’ll need to take your income over the past six months and average it. The median income for Ohio this year is $43,978, or $3,665 per month. If you earned less than that on average over the last six months, you automatically qualify for chapter 7. The number varies depending on the number of people in your household, so click here to see Ohio’s median income for various family sizes. If you earned more than that, you’ll need to go on to the next step.
2. Meaningful Repayment
The court wants to make sure that you repay as much of your debts as possible. If you earn enough to do that, you’ll have to file under chapter 13 and make regular payments to your creditors. So, the test for qualifying for chapter 7 is designed to ensure that your creditors aren’t getting short shrift. So, they determine what you would pay under a chapter 13 plan. If your chapter 13 payments would result in a meaningful repayment for your creditors, you’ll need to file under chapter 13. If not, you’ll be able to file under chapter 7.
For this part of the test, you’ll start with your average income over the past six months. Then you’ll compare it to certain national and local standards for expenses.
First, your expenses include a national standard allowance for food and clothing. This year, it’s $585 for a single person, $1,092 for a two-person household, $1,249 for a three-person household, and $1,513 for a four-person household. For each additional person after the fourth, you can add another $378.
Next, you’ll have a national standard allowance for out-of-pocket health care expenses. That’s $60 for each person under $65 and $144 for those over $65.
Next, you get a living expense allowance. That allowance depends on the county in which you live, the size of your household, and whether you own your home or are paying rent or a mortgage. For example, a single Montgomery county resident who owns her own home can claim $448 in living expenses, while a single Montgomery county resident who rents or is paying a mortgage can claim $808. For a full list of the living expenses allowed for each Ohio county, click here.
Now you add in your transportation expenses. For a single car, you can add $212 in operating costs. If you’re still making car payments, you can also add your actual car payment or $517, whichever is less.
Now, you’ll add those 4 expense categories together. For example, say you’re a single person, in Montgomery county, under the age of 65. You rent an apartment and are making payments of $600 per month on a car. You can claim $585 for food and clothing, $60 in health care, $808 in housing expenses, $212 in car operating expenses, and $517 in car ownership expenses. That’s a total of $2,182 in expenses.
Now, you’ll subtract the allowable expenses from your income. Say you earn $3,000 per month. Subtract expenses of $2,182 to get your disposable income. In this case, it’s $818.
Now, you’ll need to take that disposable income and multiply it by 60. A chapter 13 plan lasts for 5 years, so that represents your 60 monthly payments if you were to file under chapter 13. In this case, it’s $49,080 ($818 x 60).
The next step is to determine if you can make a meaningful payment to your creditors. The court’s standard for “meaningful” is if you can pay back 1/4 of your debt. So, add up your total unsecured debts – credit cards, medical debt, personal loans, and any other unsecured debt you owe. Divide it by 4 and compare it to the total chapter 13 payments you could make, as calculated above. Say you owe a total of $200,000. Divided by 4, that’s $50,000. Above, we calculated that your plan payments would total $49,080. That’s less than a quarter of what you owe, so you qualify for chapter 7. If, on the other hand, you owed $100,000, you would not qualify for chapter 7. You could pay off almost half of that debt under chapter 13.
3. Totality of the Circumstances
Even if you don’t qualify under the means test above, you may still be able to prove that you need chapter 7 bankruptcy due to extenuating circumstances. For example, a family member might have an expensive health problem that will make you unable to keep up with a chapter 13 payment plan.
Do you qualify for chapter 7?
As you can see, the test for whether you qualify for chapter 7 is somewhat complicated. If you think bankruptcy might be right for you, contact us today for a free consultation with an experienced Ohio bankruptcy attorney. We’ll evaluate your case and help you decide how best to manage your debt.