You may be experiencing unemployment and deciding what to do next. You have options, so in this article, we will provide more specific information about filing bankruptcy and alternative options after being unemployed because of the coronavirus. Many people are facing job loss or temporary layoffs related to COVID-19 as more states impose mandatory stay-at-home orders. The financial crisis caused by the coronavirus could extend for several weeks or several months. For some individuals, the financial problems caused by the pandemic may result in filing bankruptcy.
The good news is that many people who did not qualify for Chapter 7 before COVID-19 may qualify for Chapter 7 after the COVID-19 crisis. Through a Chapter 7 bankruptcy filing, you might find the debt-relief you need to get back on your feet after being unemployed because of coronavirus.
1) How Do I Qualify For A Chapter 7 When My Average Income Included Employes Wages And Unemployment?
When you file for debt relief under Chapter 7, you must meet income qualifications. When Congress changed the bankruptcy laws in 2005, it included an income requirement for Chapter 7 debtors (individuals who file for bankruptcy relief). Typically, debtors who do not meet the income requirements do not qualify for a bankruptcy discharge (debt forgiveness) under Chapter 7. Individuals with higher income levels typically must file a repayment plan under Chapter 13 to get rid of debts in bankruptcy. That said, asking whether it is better to file a Chapter 7 or Chapter 13 is a very good question to ask.
However, individuals who are unemployed or have a reduction in income during the coronavirus pandemic might now qualify for Chapter 7, even though they may have not qualified for Chapter 7 before the COVID-19 pandemic. The Means Test used in Chapter 7 cases measures your income during the six months before filing a Chapter 7 bankruptcy case. Therefore, if you have a reduction in income because you are out of work during the coronavirus pandemic, your income level may drop below the level required to receive a bankruptcy discharge under Chapter 7.
In this article, we discuss income requirements for Chapter 7 in detail, including how to calculate your median income to see if you qualify for Chapter 7. Individuals and families who are struggling with debts because of the coronavirus pandemic should periodically review their median income to determine if they now qualify for Chapter 7. One or two months of unemployment could qualify you for a bankruptcy discharge in Chapter 7.
2) What Are The Income Requirements for Chapter 7?
To file for bankruptcy relief, you must complete a bankruptcy form called the Means Test. The Means Test calculates your average income and compares it to the average income for households in your state. If you have four members of your household, your income is compared to the average income for a household of four in your state.
If your average income is higher than the median income for your state, you “fail” the Means Test and may not qualify for debt forgiveness under Chapter 7. Each state has different median income levels based on data gathered from the U.S. Census Bureau and the Internal Revenue Service. The figures are updated every few months to ensure that the income levels reflect current median income levels for each state. The most recent median income and household size by your state for filing on or after April 1, 2020 can be found here.
To calculate your median income for the Means Test, multiply your average monthly income (current monthly income) by 12. The Means Test has two sections. You could “pass” the second section of the Means Test to qualify for Chapter 7 even if your median income is above the state median income. We discuss the second section of the Means Test below after we explain how to calculate your average income.
3) How Do I Calculate My Monthly Income for Chapter 7?
Average or current monthly income includes all income received during the six months before filing for bankruptcy relief. Therefore, if you file a Chapter 7 bankruptcy petition on June 10, 2020, you must include household income received from December 1, 2019, through May 31, 2020. Add all income during those six months and divide the total by six to calculate your average or current monthly income (CMI).
All income must be included when calculating your current monthly income or average monthly income except for income received under the Social Security Act (i.e. Social Security, SSI, and SSDI benefits) or payments received by victims of war crimes or terrorism. Use gross income when calculating average monthly income, except for income received from rents or the operation of a business, profession, or farm. For rents and business income, you use the net income reported to the IRS after deducting necessary business expenses. Examples of income used to calculate the Means Test include, but are not limited to:
- Salary and hourly wages
- Overtime pay
- Interest payments
- Retirement and pension income
- Dividend and royalty payments
- Unemployment compensation
- Net income from rents or rental property
- Net income from the operation of a business
- Annuity payments
- Workers’ compensation income
- State disability insurance benefits
- Alimony and child support payments
- Regular contributions to household income by your dependents or spouse, even though they may not be filing for bankruptcy relief
4) How do I take the Chapter 7 means test?
The Chapter 7 Means Test is comprised of the following bankruptcy forms: 1) Chapter 7 Statement of Your Current Monthly Income 2) Statement of Exemption from Presumption of Abuse Under §707(b)(2) 3) Chapter 7 Means Test Calculation. Many people only need to take the first form, but we will walk you through everything to make sure it’s clear as it took us a long time to figure this out. First, you should know what your income is in bankruptcy terms. You have information about it above, but you may want to take the following calculator first to help.
a) Find Your Average Income
Here’s how the bankruptcy form expresses average income: “Fill in the average monthly income that you received from all sources, derived during the 6 full months before you file this
bankruptcy case. 11 U.S.C. § 101(10A). For example, if you are filing on September 15, the 6-month period would be March 1 through August 31. If the amount of your monthly income varied during the 6 months, add the income for all 6 months and divide the total by 6. Fill in the result. Do not include any income amount more than once. For example, if both spouses own the same rental property, put the income from that property in one column only. If you have nothing to report for any line, write $0 in the space.” That’s complicated. We built the calculator below to help.
b) Use your income in the Statement of Current Monthly Income to estimate qualification
You can use the following Statement of Current Monthly Income below using the bankruptcy form to help you estimate your Chapter 7 qualification. The calculator is specialized for your state as we take all of the state income limit for Chapter 7 bankruptcy for every state.
c) What Happens if I Fail The Means Test (i.e the first test above shows that I make too much money)?
If your median income is above the median income for your state, you might still qualify for forgiveness of debt in Chapter 7 by completing the second section of the Means Test. Thankfully, we also built a calculator that covers these scenarios as well in case you make too much based on the above calculator.
The second part of the Means Test above calculates your disposable income. Disposable income is the money you have left over each month after paying allowable living expenses. Examples of deductions include, but are not limited to:
- Federal and state income taxes
- Medicare and Social Security deductions
- Mandatory retirement plans, uniforms, and union dues
- IRS allowances for food, housing, transportation, health care, and clothing
- Daycare or childcare services
- Court-ordered child support payments
- Mortgage payments and car loan payments
- Real estate taxes and homeowner’s insurance
- Some charitable contributions
- Disability and life insurance premiums
After deducting your allowable living expenses from average monthly income, if the figure is negative or zero, you “pass” the Means Test. If your disposable income is below a certain amount, you can also pass the Means Test and file under Chapter 7. If you are unsure whether you qualify for Chapter 7, you can use the free Chapter 7 Means Test Calculator to estimate.
Exceptions to the Means Test
If your debts are primarily business debts or you have provided certain homeland defense or military services, you might not be required to meet the income requirements of the Means Test to file under Chapter 7. We have built this functionality in the above median calculator above, but please reach out to us if you have any questions.
Exploring Chapter 7 for Coronavirus Debt Relief
If you want to explore Chapter 7 in greater detail, there are several resources that can help. You can check the Chapter 7 Bankruptcy Process to understand how the process works and also take a means test calculator to estimate your qualification. You may always want to review the Chapter 7 Bankruptcy Pros and Cons. The goal is for you to be most informed about your options and the pros and cons of your options
5) What Are Some Things You Should Consider Before Filing Chapter 7?
Even though you might qualify for Chapter 7 because of unemployment due to the coronavirus, there are some things to consider before filing Chapter 7.
Can you find other employment or will the hardship last for a long time?
If you can avoid filing bankruptcy, that might be the best choice for your financial wellbeing. A Chapter 7 bankruptcy remains on your credit report for 10 years, which could impact your finances long after the COVID-19 crisis ends.
Will your creditors work with you?
Many creditors are working with individuals who cannot pay their bills. Check with your creditors to see if you can pay partial payments or defer payments. However, make sure you understand the risks. Will these payments be due in one lump sum in a few months? Will you have the money to pay a lump sum to catch up on payments?
Are there government assistance programs from the stimulus bill that can help you?
There are several provisions of the stimulus bill that helps individuals and families struggling with debts. Small businesses may also benefit from the provisions of the bill. We discuss the provisions of the CARES Act in more detail in our Coronavirus Hardship article.
Will you receive a tax refund that can help pay bills?
If you have not filed your income tax refund, now might be a good time to do so if you are expecting a tax refund. Prepare your tax return to determine whether you are entitled to a tax refund. If you owe, you can take advantage of the extension to file tax returns to delay the payment.
Are there alternatives to filing bankruptcy?
Although you bankruptcy may often a viable option for many, there are alternatives to bankruptcy to consider. Debt consolidation is one way to avoid filing bankruptcy. Also, debt settlement can give you the relief you need without filing bankruptcy, but just be wary of the debt settlement option.
If you just need a planner to help you get debt freedom quickly, you may check out a Debt Payoff planner that can help you prioritize your debts and develop a monthly plan to pay off debts that works for you. The Savvy debt payoff method may help you avoid Chapter 7 while getting rid of debts.
Do You Still Have Questions About Debt Relief?
Ascend has numerous resources and tools you can explore as you develop a plan to deal with debt problems caused by the coronavirus pandemic. If you need additional help or have questions, contact Ascend online or call us at 833-272-3631.