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Is there an Income Limit for Filing Chapter 7 Bankruptcy in Michigan?

Debtors who want a clean slate from extensive debt may file for Chapter 7 bankruptcy. However, the law restricts eligibility for Chapter 7 bankruptcy to debtors whose income falls below certain thresholds.

What Is Chapter 7 Bankruptcy?

The Bankruptcy Code provides several mechanisms for resolving debts, including Chapter 7. Under Chapter 7 bankruptcy, also called “liquidation bankruptcy,” a debtor sells their nonexempt property, using the proceeds to repay creditors. Debtors can keep exempt property.

Michigan and federal bankruptcy laws provide lists of property that debtors may keep in Chapter 7 bankruptcy, although debtors must choose whether to use the state or federal list. Exempt property includes specific value in a primary residence or automobile, personal property up to a maximum aggregate value, retirement accounts, insurance benefits, and public benefits.

Once a debtor has paid the liquidation proceeds to their creditors, the bankruptcy court discharges any unpaid debts, except for certain types of debt like tax liabilities, court fees, child support, or alimony. Debtors may prefer Chapter 7 bankruptcy to alternative forms of bankruptcy, such as Chapter 13 bankruptcy because Chapter 7 allows debtors to resolve their debts and get a fresh financial start quickly.

Filing for Chapter 7 bankruptcy requires meeting financial eligibility requirements. Debtors must meet the “means test,” which determines whether a debtor has sufficient disposable income to pay down their debt.

The Chapter 7 Bankruptcy Means Test

Debtors filing Chapter 7 bankruptcy must prove to the court that they satisfy the means test. However, the law exempts specific debtors from the means test, including those with primarily non-consumer debts or disabled veterans who incurred most of their debt while on active duty.

The means test first looks at a debtor’s monthly household income. A debtor passes the means test if they have a monthly household income below the Michigan median income for the same size as the debtor’s household. The test calculates a debtor’s monthly household income by averaging it over six months before filing for bankruptcy, subtracting certain monthly expenses.

Debtors with a monthly income above the Michigan median income can pass the means test under an alternative method, which takes a closer look at the debtor’s income and expenses. The test includes nearly every source of income, including business income, rental income, investment income/dividends, retirement benefits, and unemployment benefits. The test also includes necessities like food and clothing, out-of-pocket health care expenses, housing costs, utilities, and transportation expenses. The test subtracts expenses from income to determine a debtor’s disposable income. 

When a debtor’s income falls below a specific threshold, they pass the means test; if it falls above a higher threshold, they fail. However, when a debtor’s income falls between the two threshold amounts, they must conduct more detailed calculations to determine if they qualify to file for Chapter 7.

Contact a Bankruptcy Attorney Today for Help Getting a Fresh Start

If you’re considering filing for bankruptcy to resolve your debts and get a fresh start, an experienced bankruptcy attorney can evaluate your eligibility for Chapter 7 bankruptcy and determine whether it will best serve your goals and interests. Contact Marrs & Terry, PLLC, today for a free, confidential consultation to discuss your legal options.