How the New Tax Law Will Affect Bankruptcy?

Bankruptcy Lawyers

Individuals used to have the option to either file under Chapter 7 bankruptcy or Chapter 13 bankruptcy, whichever felt best fit for the individual. Under the new tax law those options have become very limited to qualify under Chapter 7. Many filers will no longer be eligible to file under Chapter 7, and the filer will have to file under Chapter 13 bankruptcy. It can be helpful to have the assistance of Arlington, TX bankruptcy lawyers.

Chapter 7 Bankruptcy will be harder to file.

Under the new tax law, Chapter 7 prohibits certain individuals with high incomes from filing under Chapter 7.  

  • Individuals whose income is above the state median; and
  • Individuals who can afford to pay $100 per month to creditors

If the individual falls under the above categories then he/she will no longer be able to file for Chapter 7 bankruptcy and will have to file for Chapter 13 bankruptcy.

How your income will be determined?

First, measure your current monthly income against the median income for a household of your size in your state. Second, if your income is less than or equal to the median of your state then you can file for Chapter 7 bankruptcy. Third, if it is more than the median, you must pass the “means test” (new requirement under the new tax law) in order to file for Chapter 7 bankruptcy.

What is the Mean Test?

The means test helps figure out if you have enough disposable income after subtracting certain allowed expenses and required debt payments (payments to a Chapter 13 plan). If the income left over after the calculation is below a certain amount than you can file for Chapter 7.

What is the difference between Chapter 13 and Chapter 7?

The difference between Chapter 13 and Chapter 7 is that in Chapter 13 the debtor must enter a multi-year repayment plan based on an expense-to-income formula. The debtor is than required to make mandatory payments to the creditor under Chapter 13. Whereas, in Chapter 7 the debtor has the option to liquidate all assets.


The new tax law requires the individual who is filing for bankruptcy to attend mandatory credit counseling with an agency approved by United States Trustee’s Office. It does not matter whether you are filing under Chapter 7 or Chapter 13 you must still complete credit counseling.

Thanks to Brandy Austin Law Firm for their insight into tax law and bankruptcy.