In Kentucky alone, there were 11,431 bankruptcy filings in 2020 according to the American Bankruptcy Institute. The majority of those bankruptcy filings (7,764) were Chapter 7. However, in order to qualify and file for Chapter 7, people generally have to jump through some hoops. One of those hoops is the Chapter 7 means test Kentucky. If you need professional guidance for passing the means test, bankruptcy attorneys at O’Bryan Law Offices want to help. Call us today at 502-400-4020 for a free consultation.
What is the Chapter 7 Means Test Kentucky?
Basically, the means test is a test that bankruptcy filers have to take in order to determine if their income is low enough to file for Chapter 7. The main point of the means test is to prevent those with high incomes from filing for Chapter 7. If someone fails the means test, they may be able to file for Chapter 13 bankruptcy instead. However in Kentucky, if you make less than the state’s median income for your household size, then you don’t have to take the means test and you can just file for Chapter 7.
What is the Kentucky Median Income?
As of 2019, the median income in Kentucky is $26,653, ranking 45th in the U.S. for median income. Meanwhile, the median income for a household in Kentucky is approximately $50,589.
What is Considered Low Income in Kentucky?
Basically, low income households are defined as those whose incomes are less than 80% of the area’s median family income. Meanwhile, families with very low incomes are those whose salaries are less than half of the area’s median family income.
How to Qualify for Chapter 7 in Kentucky
Your monthly income from the last six months must be less than the median income for a similar-sized household in Kentucky. If not, you must pass the means test.
In the past eight years, you must not have filed for Chapter 7 bankruptcy.
In the past six years, you must not have filed for Chapter 13 bankruptcy.
If you tried to file for Chapter 7 or 13 but the bankruptcy court denied you, you must wait at least 181 days before filing again.
You must undergo a debt counseling course before filing for Chapter 7.
You can’t be trying to defraud creditors.
Debts That Chapter 7 Bankruptcy Can Discharge
Listed below are the debts that a Chapter 7 bankruptcy filing can generally wipe out:
Credit card debts
Mortgage or car loans
Income tax debt
All unsecured debts
Debts That Chapter 7 Bankruptcy Can’t Discharge
Listed below are the debts that a Chapter 7 bankruptcy filing can’t wipe out:
When to File for Chapter 7 Bankruptcy
Sometimes it’s difficult to decide if your debt is manageable on your own or if professional help is necessary to manage your debt. You should consider filing for Chapter 7 if:
Your debt accounts for more than half of your annual income
It’s estimated that it would take more than five years to pay off your debts if you took extreme measures
Your debt negatively impacts parts of your life including your mental health, your relationships, or your ability to sleep at night
You don’t have any disposable income
Your monthly income is less than Kentucky’s median income of $26,653
What to Avoid on the Means Test
In order to pass the Chapter 7 means test Kentucky, you need to carefully follow all the rules. Make sure to avoid doing these things on the means test:
Reporting incorrect income: In order to provide your most accurate annual income, you must include your average monthly income for the six months leading up to your filing. More specifically, you’ll use the entire six months prior to your filing date, which ends on the last day of the calendar month. Double this number and compare it to Kentucky’s median income of $26,653 for individuals or $50,589 for households.
Including any Social Security benefits: It’s important to not include any Social Security benefits as part of your income on the means test. If you include it, your median income may be too high and you won’t qualify for Chapter 7 as a result.
Not reporting your spouse’s income: If you’re married and you’re filing for bankruptcy but your spouse isn’t, you still need to report their income especially if you both share a household. Including someone else’s income can make it harder to pass the means test, but you can still leave out parts of your spouse’s income that aren’t used for household items. You can do this in the marital adjustment deduction section of the means test. Other portions of your spouse’s income that you can exclude are student loan payments, withholding taxes, and prior support obligations.
Reporting taxes incorrectly: Many bankrupt people unintentionally report their taxes incorrectly on the means test. They do this by utilizing the amounts withheld from their paychecks each month to calculate income tax expenses on the means test. However, under the means test, you can only deduct your actual tax due. If you receive a significant tax refund each year, your withholdings may be overestimating your tax deduction.
Disposable Income and the Means Test
If your annual income happens to exceed Kentucky’s median, you must then determine how much disposable income you have. Basically, disposable income is the income that you have left over after paying your bills. If you have a certain amount of disposable income every month, you may fail the means test and may not be able to file for Chapter 7. This is because in theory, you can put that disposable income towards your debts every month.
Is a Means Test Necessary for Business Bankruptcy?
Basically, the means test is only reserved for consumer bankruptcy. Businesses that need to file for bankruptcy don’t have to take the means test. Instead, they can just file for Chapter 11 or Chapter 13 small business bankruptcy. However, sometimes it’s difficult to determine whether someone should file for consumer or business bankruptcy. For example, if a business owner has both consumer and business debt, they will need to file based on what kind of debt they have more of. If they have more consumer debt, they will take the means test and file for Chapter 7 if they pass. If they have more business debt, they will skip the means test and file for Chapter 11 or Chapter 13.
Chapter 11 Bankruptcy
Chapter 11 is a good option for large businesses, small businesses, or those involved in business partnerships. The entire Chapter 11 process can take between six months and two years to complete. You or your business may be a good candidate for Chapter 11 if:
You don’t meet the debt requirements to file for Chapter 13 as an individual, not a business
A business owner wants to avoid property or other asset liquidation
You want to keep your business functioning throughout the bankruptcy process
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is also a good option for individuals and small business owners who don’t qualify for Chapter 7. However, Chapter 13 generally takes longer to complete compared to Chapter 11. The expected timeline for Chapter 13 is three to five years. Chapter 13 may be the right option for you or your small business if:
Benefits of Chapter 11 and Chapter 13 Bankruptcy
If you happen to fail the Chapter 7 means test, you could still qualify for Chapter 11 or Chapter 13. These types of bankruptcy have benefits that Chapter 7 doesn’t, including:
Keeping assets and property that Chapter 7 would force you to liquidate
Allowing you to sell assets that you don’t need or can’t afford
Changing payment terms on secured debts, such as mortgages or loans
Eliminating assets and obligations that you can’t pay over the course of Chapter 13. This benefit doesn’t apply to Chapter 11.
Call a Bankruptcy Lawyer at O’Bryan Law Offices Today
When it comes to passing the Chapter 7 means test Kentucky, attorneys at O’Bryan Law Offices will be there with you every step of the way. Whether you want to file for Chapter 13, Chapter 7, or LLC bankruptcy, we’re here for you. Schedule a free initial consultation with our lawyers. We have offices in Louisville, Frankfort and New Albany. Contact us by calling 502-400-4020 or by emailing us through our website.