How do Income Limits Influence Eligibility for Arizona Chapter 7?
Feeling crushed by debt is overwhelming enough without trying to navigate the complex rules of bankruptcy. For many Arizona residents seeking a fresh start, the biggest question is whether they even qualify for Chapter 7 relief. The answer hinges on a process called the “means test,” which compares a household’s income to the state’s median income.
Understanding this test is the first step toward financial freedom. This article provides a step-by-step guide to the means test, explains what happens if your income is too high, and details common mistakes to avoid. Jim Gaudiosi, an experienced Arizona bankruptcy attorney, breaks down the means test into simple, understandable terms to help you find clarity.
What is the Arizona Chapter 7 Means Test?
The means test was created to ensure that Chapter 7 bankruptcy, which erases most unsecured debts like credit cards and medical bills, is reserved for those who genuinely lack the financial ability to repay their creditors. It is essentially a financial gatekeeper.
The test is broken into two main parts:
- The Median Income Comparison: A straightforward comparison of your income to the Arizona median.
- The Disposable Income Calculation: A more complex analysis of your income and expenses, used only if your income is above the median.
A Step-by-Step Guide to the Means Test
For most filers, the process begins and ends with the first part of the means test.
Step 1: Calculate Your “Current Monthly Income”
First, you must determine your “current monthly income.” This is not just your last paycheck; it is your average gross (pre-tax) income from all sources received over the last six full calendar months.
Sources of income to include are:
- Wages, salaries, tips, and commissions
- Income from self-employment or business operations
- Unemployment benefits
- Retirement income and pensions
- Rental property income
- Regular contributions from family members
Step 2: Determine Your Household Size
Next, you must identify your household size according to bankruptcy court standards. This typically includes you, your spouse (if filing jointly), and any dependents you support financially. The rules can be nuanced, so it is important to get this number right.
Step 3: Compare Your Income to the Arizona Median
Once you have your average monthly income and household size, you compare your income to the current median income figures for Arizona.
Arizona Median Income by Household Size (For cases filed on or after April 1, 2025)
| Household Size | Annual Income | Monthly Income |
| 1 | $68,493 | $5,708 |
| 2 | $89,122 | $7,427 |
| 3 | $102,570 | $8,548 |
| 4 | $119,773 | $9,981 |
For each individual above 4, add $9,900 annually ($825 monthly).
Source: U.S. Department of Justice/U.S. Trustee Program. These figures are updated periodically.
Step 4: Analyze Your Result
- If your income is below the median: You have passed the first part of the means test and will likely qualify for Chapter 7 bankruptcy, assuming you meet other eligibility requirements.
- If your income is above the median: This does not mean you have failed. It simply means you must proceed to the second, more detailed part of the test to determine if you have enough disposable income to repay your debts.
What if Your Income is Above the Median?
If your income exceeds the state median, the goal is to calculate your “disposable income.” This is done by subtracting specific, legally allowed monthly expenses from your current monthly income.
Examples of these allowable deductions include:
- Federal, state, and local taxes
- Mortgage or rent payments
- Car loan payments and vehicle operating expenses
- Health insurance premiums
- Childcare costs
- Secured debt payments (like a mortgage or car loan)
This calculation is highly complex and uses a combination of your actual expenses and standardized figures from the IRS. An experienced attorney’s guidance is critical here to ensure every allowable expense is correctly deducted, as it can make the difference between qualifying for Chapter 7 and not.
Practical Guidance for the Means Test
How to Handle Fluctuating Income (Gig Work, Commissions, etc.)
For individuals with variable income from gig work, freelance projects, or sales commissions, the means test can seem daunting. The key is accurate record-keeping. You must gather documentation for all income received in the six months prior to filing and calculate a precise average. Failing to account for this income correctly can jeopardize your case.
3 Common Mistakes to Avoid on the Arizona Means Test
- Using Net Income Instead of Gross Income: The test requires your pre-tax (gross) income. Using your take-home pay will result in an incorrect calculation.
- Incorrectly Calculating Household Size: Including a roommate who pays their own way or excluding a dependent you fully support are common errors that can skew the results.
- Forgetting a Source of Income: All income sources must be included. Intentionally or unintentionally omitting one can lead to the dismissal of your bankruptcy case.
Are There Exceptions to the Means Test?
A small number of filers may not need to take the means test at all. The two primary exceptions are:
- Non-consumer (“business”) debts: If more than 50% of your total debt was incurred for a business you owned, you are generally exempt.
- Certain military service members and veterans: Disabled veterans and certain members of the armed forces who incurred their debt while on active duty may be exempt.
What if You Don’t Qualify for Chapter 7?
Failing to qualify for Chapter 7 is not the end of the road. It often means you are a candidate for Chapter 13 bankruptcy. Chapter 13 is a powerful alternative that allows you to reorganize your debts into a single, manageable payment plan over three to five years. It is an effective tool for stopping foreclosure, catching up on missed car payments, and managing debts that Chapter 7 cannot erase.
Conclusion: Don’t Navigate the Means Test Alone
The Arizona means test is a critical and complex step where accuracy is paramount. An error in your calculations or a misunderstanding of the rules can lead to the dismissal of your case, leaving you back where you started.
An experienced Arizona bankruptcy attorney can analyze your unique financial situation, ensure your filing is accurate and complete, and guide you toward the best possible outcome. If you have questions about your eligibility for Chapter 7, contact Gaudiosi Law for a confidential consultation to review your options and create a clear path forward.
