Many Arizona residents who file for bankruptcy wish to proceed under Chapter 7, otherwise known as a complete liquidation, as they receive a complete discharge of most unsecured debts following the close of the bankruptcy proceedings while still being able to retain certain types of exempt property. In order to qualify to file under Chapter 7, however, filers must undergo a process called “means testing” to determine if they meet income eligibility requirements.
Means testing takes the debtor’s overall income and compares it to the median income for the state of residence. For a single person, the median income in Arizona for 2014 is $42,608, while the median for larger families is higher. People input the median income for their state and family size in the formula.
When calculating the means test, such expenses as allowable housing, clothing, food and transportation costs are entered. The allowable amounts are also set according to the state where the debtor lives. In Arizona, the allowable housing and utility expenses vary by county as well. National standards are in place for certain categories such as out-of-pocket medical expenses.
Although people may initially believe their income may place them outside of Chapter 7 eligibility, it is possible that when the allowable expense categories are taken into account, they may still meet the filing guidelines. If the filing is made under Chapter 7 and the means testing calculation is rejected by the bankruptcy court, it is still possible to convert the filing to Chapter 13. Those who are considering bankruptcy but who also have questions about whether they will be allowed to file under Chapter 7 may wish to gather relevant financial documents and meet with a bankruptcy lawyer in order to determine if they qualify.
Source: The United States Department of Justice, “Means Testing“, October 18, 2014