If you are considering filing for a Chapter 7 bankruptcy, you need to understand that the bankruptcy laws have tightened up in recent years, and by that, I mean that you must qualify first before you can file. There are certain income standards that must be met for a Chapter 7 bankruptcy. The basic income test is that your average monthly income for the last six months is below the mean income for the state you live in.
For most people with incomes much greater than their state’s median income, filing for Chapter 7 bankruptcy will not be possible. However, certain chapter 7 bankruptcy allowable expenses can be deducted from your monthly income to determine your eligibility for Chapter 7, so if your income is above the median income threshold, take note of the expenses below that you are allowed to deduct from your income.
Certain types of insurance can be deducted
This includes health insurance, disability and term life insurance. Please take note that it is term life insurance and not whole life that is deductible. This latter type of insurance is considered partly as an investment. Term life insurance does not build-up a cash value and represents a monthly expense. The amounts spent on these three types of insurance can be deducted in their entirety from you monthly income. In addition, certain medical expenses that are not covered by your health insurance policy may also be deductible.
Child care deductions
Money you spend on daycare for your baby or toddler is usually deductible as well as pre-school expense. In some cases, you may be able to deduct school tuition for your privately educated child. If you are spending money for the care of a disabled child or an elderly member of the family, these expenses are usually deductible too.
Loan and mortgage payments
These include any loans that are secured by collateral. This may include, but not limited to, a car payment and your house payment. It also includes a second mortgage that is secured by the equity in your house. What is not included is any debt you have that is not secured such as credit card debts.
Child support can be deducted
In general, any payments you are making because of a court order can be deducted from your income. Most common are child support and alimony payments, but they are not limited to only these two court ordered payments.
Tax payments
If you are making payments on back taxes, you will be able to subtract this from your monthly income. This includes both state and federal income taxes that are owed. Current taxes as well as back taxes are included as expenses.
The chapter 7 bankruptcy allowable expenses above are only a partial list of items that you can deduct from your monthly income, so if you are close to qualifying, there may be other deductions you are entitled to. However, keep in mind that a Chapter 7 bankruptcy is the last option for your personal finance problems, and there are other possible solutions. You can contact Jed Shaw at our office to discuss your situation in more detail. Our phone number is 713-750-9038.