Chapter 7 Means Test Explanation
The means test is an income test that looks at your average monthly income and then multiplies it by twelve to get your average annual income. This annual income is then compared to the median income in Washington to see if you qualify for Chapter 7 bankruptcy. They get those figures from the Census Bureau. Here are some additional details:
- The means test looks at your household income, even if your spouse is not filing with you (unless you are legally separated).
- You will fill in the average monthly income you got from all sources in the six months before you file for bankruptcy. You will then divide the income for those six months by six to determine your average yearly income.
- Don't include the same income more than once. For example, if you and your spouse own the same rental property, just put the income from that property in one column.
Washington Chapter 7 Bankruptcy Income Limit
Washington Chapter 7 median income limits for various household sizes are here. To qualify for Chapter 7 bankruptcy, you want your household income to be below the figures shown below.
| # of People | Annual Income |
|---|
| 1 | $83,033 |
| 2 | $99,852 |
| 3 | $121,292 |
| 4 | $141,177 |
| 5 | $151,077 |
| 6 | $160,977 |
| 7 | $170,877 |
| 8 | $180,777 |
| 9 | $190,677 |
Remember that you can add $9,900 for each additional family member.
What Is Considered Income?
Not all income is included in this test. For instance, certain disability and social security income are exempt from the bankruptcy means test. These are all the types of income that will be included in the bankruptcy above means test.
- Salaried income: The amount you get paid each month
- Spousal income: Your spouse's income is subject to challenge if you're in a joint case or aren't officially separated
- Hourly and overtime pay: You can deduct any overtime you work
- Net Rental Income: Any money you make from renting out real estate is included
- Washington government income: Your state payments are included on this list if you get any
- Alimony and child support
- Royalties, Interest, and Dividends: funds from investments and entrepreneurial ventures
- Retirement and Pension Income
- Net business income: The money you make from your firm is included if you are the owner and operator
- Payments for annuities
- Compensation for unemployment
- Benefits from Worker's Compensation
What Is Considered In Household Size?
In bankruptcy, household size is defined as all individuals financially connected within a single dwelling. This includes immediate family, dependents, and those who rely on or contribute to the household's resources. Generally, it usually goes by the saying “heads on beds,” sometimes, the attorney may look at who is filed within your taxes, so be sure to seek council.
Timeframe of Filing Another Bankruptcy
If you filed for bankruptcy in the past and are looking to file again, be sure that the appropriate amount of time has passed. Before you file another chapter of bankruptcy, you may have to wait a few years. Check out the timeframe below:
Chapter Filed Earlier, Chapter to be Filed, Time Restriction
- Chapter 13, Chapter 13, 2 years between filing
- Chapter 7, Chapter 13, 4 years between filing
- Chapter 13, Chapter 7, 6 years between filing
- Chapter 7, Chapter 7, 8 years between filing
Washington Above Median Bankruptcy Means Test
If you used the bankruptcy means test calculator and did not qualify or determined that your household income is higher than the median through our summary above, there is still a possibility for you to qualify. In this case, you will have to use other means test forms. The first is called the "Statement of Exemption from Presumption of Abuse Under §707(b)(2)." It helps determine if you're exempt from the presumption of abuse. The second form is the "Chapter 7 Means Test Calculation." This allows you to deduct your allowable monthly expenses from your current monthly income (CMI) to determine your disposable income. The costs considered are a mix of national and Washington expenses.
You might still qualify for a Chapter 7 bankruptcy if your disposable income falls below a certain amount. That said, you can take the Washington Chapter 7 Bankruptcy Calculator below to see whether you may qualify for the initial part of the means test. Disposable income is the money you have left after paying all your expenses. And if your disposable income falls below a certain amount, you might still be eligible for Chapter 7 bankruptcy.
Allowable deductible expenses
Deductible expenses are the actual expenses that you can deduct on the second part of the bankruptcy means test, such as:
- Salaried income: The amount you get paid each month.
- Spousal income: Your spouse's income is subject to challenge if you're in a joint case or aren't officially separated.
- Hourly and overtime pay: You can deduct any overtime you work.
- Net Rental Income: Any money you make from renting out real estate is included.
- Arizona government income: Your state payments are included on this list if you get any.
- Alimony and child support
- Royalties, Interest, and Dividends: funds from investments and entrepreneurial ventures
- Retirement and Pension Income
- Net business income: The money you make from your firm is included if you are the owner and operator.
- Payments for annuities
- Compensation for unemployment
- Benefits from Worker's Compensation
You can also deduct other expenses for exceptional circumstances. The amounts allowed for these expenses depend on the number of individuals in your household. You can check out the current national standards here for maximum amounts. These expenses include:
- Housekeeping supplies
- Clothing expenses
- Food expenses
- Personal care services and products
- Housing and utility expenses
- Transportation expenses
- Out-of-pocket healthcare expenses
You can contact a local bankruptcy attorney if you have any other questions or need further guidance. They may provide a free evaluation and help you navigate this process.
What Happens If You Fail the Bankruptcy Means Test?
If you don't pass the Chapter 7 bankruptcy means test, there are other options for you to explore. Other alternatives include Chapter 13 bankruptcy, debt settlement, debt management, or debt payoff planning.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy in Washington is a wage earner's plan. You make a payment plan to pay back a portion of your unsecured debts, so you will be set on a repayment plan where you can pay back none, some, or all of the debt. Your non-exempt equity and disposable income determine the payment plan. The good news is you can usually keep your assets. There's no income qualification as long as you stay under the debt limits, and it will only show up on your credit report for seven years. The length of the payment plan can vary, but a typical timeframe is between 36 to 60 months.
However, with Chapter 13, failing the means test means you do not have enough disposable income to pay the bankruptcy trustee at the end of each month. Because of this, the court cannot grant you a Chapter 13 bankruptcy, which may require sizable monthly payments.
Some individuals prefer Chapter 13 over Chapter 7 bankruptcy if they have more equity than what's allowed under the Washington bankruptcy exemption; Chapter 13 might be the way to go. Another reason is that it can help with foreclosures.
Debt Settlement
Debt settlement is when you or a company negotiate with your creditors to reduce the amount of debt you owe. These programs usually come with a payment plan that lasts anywhere from 12 to 60 months. However, it's essential to remember that not all debt settlement companies are equal. Some can charge more than 25% of the debt you enroll in their program. If you want to understand the intricacies of debt settlement programs, you can check out the Consumer Finance Protection Bureau.
Debt settlement usually involves a payment plan that can last 12 to 60 months and is cheaper than Chapter 13 bankruptcy.
Cons of Debt Settlement
This option has some potential negatives, namely that you tend to have to miss a few payments for your creditors to be willing to negotiate. Not only does this put you at risk of being sued by the creditor, but it also impacts your credit score for up to seven years.
Additionally, there is no legal protection, so if a creditor does not agree to a negotiated payment plan, they may sue you. If a creditor sues you, that may go on your credit report.
There are also potential taxes on the forgiven debt. Whatever debt was forgiven in the settlement may be taxable, and you have to report the canceled debt on your tax return for the year it was canceled. Generally, you may have to report any taxable amount of canceled debt as income. The creditor may send you a 1099-C form you would have to fill out.
Debt Management
Debt management, or credit counseling, is when a company negotiates with your creditors to lower the interest rate on your debt. These companies usually focus on working with credit cards, so they may be unable to lend a hand with unsecured personal loans. Once enrolled, you make regular payments to the debt management company, and they distribute the money to your creditors on your behalf. This payment plan typically lasts between 36 and 60 months.
If you have a lot of high-interest credit card debt, this option may reduce your interest rate by 10% to 20%. This will help you pay off your bills faster and may save you between 30-50% of what you currently owe.
The pro of this program is that it may allow you to pay into the principal rather than the increasing interest. If you have credit cards with high interest rates and want a less aggressive option, this may be something to look into.
The downside to this option is that you still have to pay off everything you owe, so it may be a more expensive option. The good news is that it won’t hurt your credit as much as some of the other options may. However, the accounts in the program will close, which may take a small hit on your credit.
Many debt management firms are national, so you don't have to stress about finding a local one if you live in Washington.
Summary
Although navigating Washington's Chapter 7 bankruptcy means tests and income limits may seem complicated, doing so is an essential first step toward obtaining financial relief. Many choose Chapter 7 because it is less expensive than other debt-relief options. The means test compares your household's income to the income limit in Washington while considering several exclusions.
Being eligible for Chapter 7 bankruptcy also considers your expenses and deductions. Our calculator will also help give you a more accurate picture of whether or not you may be qualified.
Other options to consider include debt management, debt settlement, or Chapter 13 bankruptcy. Regardless of the means test results, each option offers a unique set of factors to consider and possible solutions, which means there is always a way forward.
