As many Pennsylvania residents may be aware, bankruptcy is a federal legal structure. It is based on the federal Bankruptcy Code, and adheres to the rules set out thereby. However, there are variations in bankruptcies from state to state as the types of property that can be exempted in a Chapter 7 filing is usually dependent on state law, as well as what level a filer has to show to meet the “means test” for eligibility for Chapter 7.
Because one purpose of the Bankruptcy Code is to provide relief to debtors that will suffer hardship if attempting to pay their debts, the system attempts to preclude “abuse” of Chapter 7 to discharge debts of people who have the means to make payments. Due to this, a person filing for Chapter 7 bankruptcy will have to show that he or she does not make enough money to meet this test to be eligible. The bankruptcy court will first look at a person’s annual income, and compare it to the median income in the state for the filer’s household size. In Pennsylvania for example, the median income for a household of one person is around $47,000 per year.
If the filer’s income is below the median household income, he or she is eligible to file a Chapter 7. If it is higher, the filer will have to collect evidence of his or her income and expenses. The bankruptcy law has certain “allowed expenses” that can are subtracted from an individual’s total income from all sources. If this income is over a certain amount, then the individual will not be eligible to file a Chapter 7 bankruptcy (in such a case, a Chapter 13 may still be possible).
While many Pennsylvanians may balk at having to disclose their incomes in a federal court setting, the potential benefits of a successful bankruptcy discharge may be well worth it. Being able to begin one’s financial life again, with no creditors calling or sending letters and always worrying how one is going to pay can put one on the road to fiscal success.