Most Chicago residents make the hard choice to file a bankruptcy petition in the belief that the final order from the court will discharge all their debts. Unhappily, this belief is wrong on two counts. First, a discharge of all debts can be obtained only in a Chapter 7 proceeding, and second, a person must pass a test of their annual income to demonstrate that they are eligible to seek relief under Chapter 7.
The mechanics of the means test
This income test, usually referred to as the “means test” was enacted by Congress in 2005 in the belief that too many people were abusing the discharge relief then available under Chapter 7. The means test has two steps. In the first step, the bankruptcy petitioner must demonstrate that his or her income is less than the maximum prescribed for Illinois residents; if the petitioner fails this portion of the test, he or she may seek to qualify by demonstrating that his or her net income after the deduction of various permitted expenses, such as housing, food, medical expense and the like. This calculation may appear to be laborious, but it can be worth the effort depending upon the petitioner’s financial status.
The determination of the petitioner’s income limit
The initial test for Chapter 7 eligibility is the petitioner’s median income. For a person who lives alone, the monthly income cannot be greater than $4,891.50, or $58,698 computed on an annual basis. The limit increases by a prescribed amount for each additional person in the household. For example, a 2-person household has a monthly limit of $6,462.25, and a six-person household has a monthly limit of $10,545.75. The means test for Illinois residents uses the average of their last six months of income.
Preparing to face the means test requires a person to collect all relevant information about their income and expenses. Anyone with questions about the means test may benefit from consulting an experienced bankruptcy attorney.