Qualifying for Chapter 7: The Means Test

Whether you qualify to file under Chapter 7 will depend on your monthly income, your monthly expenses, and the size of your household. For example, a single individual in the District of Columbia with less than $7,197.50 in monthly income will automatically qualify under Chapter 7. If your income is above the statutory thresholds to file, you may be required to file under Chapter 13 instead.

Individuals may qualify under either Section 707(b)(7)(A) (“Means Test Bypass”) or Section 707(b)(2)(A) (“Means Test”) of the Bankruptcy Code. To qualify under Means Test Bypass, your average monthly income cannot exceed than the median income in the District of Columbia for the size of your household as published by the U.S. Census Bureau:

• $7,197.50 per month for one earner

• $12,203.33 per month for a family of two or three; and

• $17,057.17 per month for a family of four, with an additional $825 per month for each family member above four.

If you don’t qualify under Means Test Bypass, you may still qualify under the Means Test itself. The test weighs your current monthly income and the size of your household against IRS Standards for living expenses, such as food, clothing, housing, utilities, and transportation, to determine whether there is a “presumption of abuse.” The Means Test was added to the Bankruptcy Code in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to curb perceived abuses of the bankruptcy system by pushing more filers into Chapter 13. Even if you don’t qualify under either section, Chapter 7 relief may still be available in extreme circumstances, such as a serious medical condition.

Exempted Property

When you file under Chapter 7, all nonexempt property you own becomes property of the estate and subject to liquidation to pay your creditors. It is critical to determine which property is exempt and which is not before you file under Chapter 7. In the District of Columbia residents may choose between two sets of exemptions, which exempt different kinds of property in different amounts, while residents in Maryland must use a single local set. After your Initial Consultation, you will receive a link to the online questionnaire that will help you determine which set makes the most sense——or whether to file under Chapter 7 at all.

Under the Federal Set, you may exempt up to $25,150 in equity in a residence you own, up to $4,000 in equity in an automobile, and up to $1,325 in otherwise nonexempt assets. Under the DC Local Set, you may exempt the all the equity in a residence, up to $2,575 in equity in an automobile, and up to $8,925 in otherwise nonexempt assets. Under the Maryland Local Set, you must exempt up to $27,900 in equity in a residence and up to $11,000 in otherwise nonexempt assets.

Federal Exemptions Set (11 U.S. § 522(d))

• $25,150 federal homestead exemption

• $4,000 in one motor vehicle

• $13,400 in household furnishings, goods, apparel, &c. (but no more than $625 per item)

• $1,700 in personal items, family items, & jewelry

• $1,325 “wildcard” (plus up to $12,575 of any unused portion of federal homestead exemption)

• $2,525 in professional or trade tools

• $13,400 accrued dividend interest in unmatured life insurance contracts

• $25,150 personal bodily injury award, rights to reparation, damages, lost compensation, &c.

• Retirement funds (IRAs limited to $1,362,800)

• Unmatured life insurance contracts

• Prescribed health aids

• Social Security payments, Veterans Affairs payments, Disability payments, &c.

DC Local Exemptions Set (D.C. Code § 15-501(a))

• Unlimited homestead exemption (unless the individual owes debts relating to federal securities laws violations, racketeering offenses, or physical violence)

• $2,575 in one motor vehicle

• $8,625 in household furnishings, goods, apparel, &c. (but no more than $425 per item)

• $400 in family pictures & books

• $850 “wildcard” (plus up to $8,075 of any unused amount of the homestead exemption)

• $1,625 in any implements, professional books or tools of the trade; $300 for library, office furniture, or implements for professionals or artists

• Unmatured life insurance contracts

• Prescribed health aids

• Social Security payments, Veterans Affairs payments, Disability payments, &c.

• Qualified retirement funds

• Provisions for three months support

Maryland Local Exemptions Set (Md. Code, Cts. & Jud. Proc. § 11-504)

• $27,900 homestead exemption

• $5,000 in wearing apparel, books, tools, instruments, or appliances necessary for a trade or profession, except those kept for sale, lease, or barter

• Money payable due to sickness, accident, injury, or death

• Prescribed health aids

• $1,000 in household furnishings, household goods, wearing apparel, appliances, books, pets, and other personal, family, or household items

• $11,000 “wildcard”

• Child support payments & alimony

• The debtor’s beneficial interest in any trust property that is immune from the claims of the debtor’s creditors under § 14.5–511 of the Estates and Trusts Article.

• With respect to claims by a separate creditor of a husband or wife, trust property that is immune from the claims of the separate creditors of the husband or wife under § 14.5–511 of the Estates and Trusts Article.

It’s possible that most or all your assets will be exempted from Chapter 7 liquidation. Fortunately, a lack of nonexempt assets to sell does not bar the discharge of your debts under Chapter 7.

Redemption & Reaffirmation of Debts

When deciding between the two sets of exemptions, you might want to keep certain nonexempt or partially exempt property, like your home or automobile. Under Chapter 7 you can choose between redeeming encumbered property by paying its full retail value or reaffirming the loan agreement, meaning the debt will not be discharged. Alternatively, you may choose to file under Chapter 13, reorganizing your debts without liquidating your nonexempt assets.

Credit Counseling and Debtor Education Courses

No more than 180 days before you file for bankruptcy, you must complete a mandatory Credit Counseling course from a qualified non-profit agency.

After you have filed for bankruptcy, you will be required to complete an additional Debtor Education course as well.

The flat fee includes the cost of both mandatory courses.

Automatic Stay

The Automatic Stay will halt nearly any lawsuit, foreclosure action, eviction action, wage garnishment, utility shutoff, or other debt collection activity with few exceptions. The Automatic Stay goes into effect as soon as you file for bankruptcy——no hearing is required. The stay provides immediate relief and puts almost any legal action against you before the Bankruptcy Court, at least temporarily. Because the Automatic Stay has immediate legal effect and is limited in duration, it is often at the center of the question of when to file for bankruptcy. You should consider the effects of the Automatic Stay prior to filing for bankruptcy to maximize its benefit to you and avoid unfavorable legal outcomes.

Meeting of Creditors

Section 341 of the Bankruptcy Code requires all Chapter 7 filers to attend the Meeting of Creditors after filing for bankruptcy, usually within 30 days. The meeting allows the Bankruptcy Trustee and any creditors in attendance to ask you questions regarding the information you provided in your Petition and Schedules, such as your assets, debts (including debts owed to you), and income. The Trustee is also required to ask you about your awareness of the effects of discharge (including on your credit history) and reaffirmation. Failure to appear may result in your case being dismissed and your filing fee being forfeited. Meetings are currently being held virtually via Zoom in both D.C. and Maryland.

You will need to show or provide the following to the Bankruptcy Trustee:

• Government-issued identification (e.g., driver’s license, passport);

• Evidence of your Social Security number (e.g., Social Security card, Form W-2, Form 1099-K);

• Evidence of current income (e.g., paystubs for past 60 days);

• Your two most recent tax returns;

• Statements for all your depository and/or investment accounts; and

• Statements of your current monthly income and living expenses (see forms).

Discharge

A debt that has been discharged through bankruptcy cannot be collected and creditors are prohibited from contacting you about or attempting to collect discharged debts. Unless a creditor objects to discharge, debts can be discharged under Chapter 7 as quickly as 60 days after the Meeting of Creditors, which usually occurs within 30 days of filing for bankruptcy. Discharge does not eliminate any liens on your property (e.g., home mortgage, automobile lien), so the security interest on any property you redeem or reaffirm will survive bankruptcy. For example, if you reaffirm an automobile loan to keep your vehicle, the debt will still be owed and the lien will still encumber the property even after discharge.

If you would like to learn more about filing for bankruptcy under Chapter 7 or would like to speak to an attorney, please contact us to schedule a free Initial Consultation.