Chapter 7 bankruptcy is generally known as “liquidation.” Chapter 7 is great for those looking to wipe-out unsecured debts, and lawsuit and to stop creditor collection calls etc. It can also temporarily halt a foreclosure sale (until and unless the lender/loan servicer seeks to lift the automatic stay in bankruptcy). In order to be able to file for chapter 7 bankruptcy protection, and to obtain a fresh start financially, generally the debtor must be able to pass a bankruptcy “means test”. What this means in layman’s terms is, if you make too much money you will be relegated to filing either a chapter 13 or chapter 11 bankruptcy. The idea is if you can afford to pay back some of your debts, then you should be forced into a chapter 13 or 11 to do so. The chapter 7 means test looks to the median state income. If you are below the median for your household size, then you qualify to file chapter 7. If you are “over-median” for your household size, then you must pass a “means-test” that takes into account your income and expense. If you fail that test, there is a “presumption of abuse” that can only be overcome by a showing of special circumstances. So the key is to know your state median numbers. Here is a list of state median incomes from total bankruptcy.
