The Arizona Chapter 7 Bankruptcy Means Test
The bankruptcy means test is the most important part of bankruptcy. It might help you file Chapter 7 bankruptcy, instead of Chapter 13 bankruptcy. This could save years of your life making payments to the bankruptcy court.
How to Use the Means Test for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy
A chapter 7 bankruptcy is for people whose income qualifies, and who do not need to make payments to the court for other issues. For example, if you are behind on your mortgage and cannot do payments to the creditor, you would need to make payments to the court. You would need a Chapter 13 bankruptcy. However, most people file a Chapter 7 bankruptcy. This allows you to get rid of all dischargeable debt while keeping all of your exempt assets. It is the traditional bankruptcy that most people want.
Additionally, the means test is based on statewide average income. The same test applies in Phoenix as it does in Mesa and Gilbert. Therefore, if you live in an area that generally makes less money, it will be easier to qualify.
How Does the Arizona Means Test Qualify Me for Chapter 7 Bankruptcy?
There are two ways your income can qualify for a chapter 7 bankruptcy. You can earn less than the mean income in Arizona. This is a dollar figure published every year by the IRS. If you earn less than the mean income in Arizona, you can qualify for a Chapter 7 bankruptcy.
If you earn more than the mean income in Arizona, you can still qualify for a Chapter 7 bankruptcy. The remainder of the means test takes into account more things than just gross income to determine if you have the means to repay some of your debt. Filling out the means test can be complicated, and it is subject to some manipulation by exaggerating the expenses and minimizing the income. Regardless, if your income, as adjusted by the Arizona Bankruptcy Means Test is less than the mean income in Arizona, you can qualify for a Chapter 7 bankruptcy. Therefore, you can still qualify for a Chapter 7 bankruptcy, even if you make more than the mean income in Arizona. You can earn significant money in Arizona and still qualify for a Chapter 7 bankruptcy. Expenses such as high (but reasonable) house or car payments, IRS payments, student loan payments, or even insurance premiums, could help you qualify for a Chapter 7. Additionally, if most of your debt came from the operation of a business, you might not have to take the means test.
How to Declare Income on the Arizona Chapter 7 Means Test
The first step is to determine your income. If your income is below the mean income in Arizona, you have passed the means test. About 90 percent of people who want to file Chapter 7 bankruptcy pass the means test by earning less than the mean income in Arizona. Find out more about the actual mean income numbers and what counts as income HERE.
You do not have to include Social Security Retirement Benefits, Social Security Disability Insurance, Supplemental Securtiy Income, TANF, or tax refunds. Include everything else. Include all of your income that you would have to declare on taxes, plus child support or spousal support. Essentially, include everything else.
If you are over the mean income in Arizona, continue to the means test step 2.
Expenses Allowed on the Arizona Chapter 7 Means Test
After determining your income, if your income is less than the mean income in Arizona, you are finished. You pass the means test. If your income is above the mean income in Arizona, you have to continue. The next step is to subtract your expenses. This gets a little more complicated with actual expenses and even supplemental IRS allowances. These are called actual and standardized expenses, respectively. If, after subtracting your expenses, you still have enough income left to pay off a measurable amount of debt, you are presumed to do a Chapter 13 bankruptcy. This is not the end of the world. You will just have to make some payments before the rest of your debt is discharged.
Fail the Means Test and File Chapter 7 Anyway - Arizona Means Test Special Circumstances
A debtor can still file a Chapter 7 bankruptcy, along with the means test showing additional income to pay creditors, even after failing to pass the means test. This will likely generate an objection from the court. The objection is titled, "Presumption of Abuse." That sounds like something bad, but it just means you have filed a Chapter 7 that has not passed the means test.
Once the Presumption of Abuse is filed, you will have an opportunity to present Special Circumstances to the court. These special circumstances could be the loss of a job or unusually high expenses like rent or medical bills. You will want to provide documentation for the special circumstances. If you are able to show that the special circumstances are continuing, the court can allow adjustment to your income or expenses. This could allow you to pass the means test.
Chapter 13 Bankruptcy After Failing the Means Test
If you still need bankruptcy relief, but cannot pass the Chapter 7 means test, you can still file a Chapter 13 bankruptcy. The Chapter 13 plan must include repayment of mandatory debts like secured debts where you will keep the collateral, and some portion of unsecured, nonpriority debts. The payments can be really small, and the amount of debt repaid almost nothing, but you cannot get discharge until after you make the payments. It is kind of like a Chapter 7 with a tail. Read more about it HERE.