Who Can File for Chapter 7 Bankruptcy?
There are many similarities between a Chapter 7 and Chapter 13 bankruptcy. But you can only qualify for one type of bankruptcy. If you fail to meet Chapter 7 requirements, a bankruptcy court can convert the case to a Chapter 13 bankruptcy, or reorganization bankruptcy, where you can complete a payment plan. The only exceptions are:
- Disabled veterans filing to eliminate debt gained while on active military duty
- Filers with debt that primarily came from operating a business
Before October 17, 2005, it was up to a bankruptcy judge to decide whether a debtor met Chapter 7 requirements. Judges could use substantial discretion when assessing the debtor's financial situation.
So, under the old law, most filers chose to have the debt discharged even if they were financially capable of repaying the debt in a Chapter 13 repayment plan. Consequently, current bankruptcy law intends to weed out filers who can afford to repay some debt.
The following are circumstances in which a debtor cannot file Chapter 7 bankruptcy.
1. Your Income Is Too High
Eligibility for Chapter 7, or liquidation bankruptcy, requires determining whether a filer's income is too high. The means test, one of the first parts of the bankruptcy process, determines whether a debtor qualifies for Chapter 7. The first part of the test requires the debtor to compare their current monthly income with their state's median income. Current monthly income is the average income in the six months preceding the application for bankruptcy.
Eligible monthly income includes the following:
- Wages, salary, tips, bonuses, overtime, and commissions
- Gross income from a business, profession, or farm
- Interest, dividends, and royalties
- Rents and real property income
- Regular child support or spousal support/alimony
- Unemployment compensation
- Pension and retirement income
- Workers' compensation
- Annuity payments
- State disability insurance
A filer does not have to include income tax refunds and Social Security retirement benefits payments.
If the filer's current monthly income is equal to or below the state's median, the debtor can file for Chapter 7. But if the filer's income exceeds their state's median family income, the filer must pass the second part of the means test to qualify for Chapter 7.
2. You Can Repay Some Debt
If a filer's income is more than their state's median income, it is necessary to look at how much disposable income the filer has left after paying "allowed" monthly expenses. These expenses include rent and food. The goal is to determine whether the filer has enough money to pay some of their unsecured creditors through a Chapter 13 repayment plan.
If the filer has a certain amount of income left over for debt payments to unsecured creditors, the federal court will dismiss the Chapter 7 filing. This is because the filer can make monthly payments.
3. You Had a Previous Bankruptcy Discharge
You may have had credit card debt, medical bills, personal loans, and other tax debts excused in the past. If a filer discharged debt under a Chapter 7 bankruptcy within the past eight years or under a Chapter 13 bankruptcy within the past six years, then the debtor is ineligible for Chapter 7. The time limitation runs from when the debtor filed for the previous bankruptcy.
4. A Previous Bankruptcy Case Was Dismissed Within the Previous 180 Days
A filer is ineligible if the dismissal of a previous Chapter 7 or Chapter 13 bankruptcy case occurred within the past 180 days for any of the following reasons:
- The filer violated a court order
- The previous bankruptcy case was considered fraudulent or constituted an abuse of the court
- The filer requested a dismissal after a lender asked the court to lift the automatic stay
Within 180 days before filing for Chapter 7, a debtor must participate in credit counseling with a nonprofit agency approved by the U.S. Trustee's office. Working with a credit counseling agency aims to help the debtor determine whether other options besides bankruptcy are available.
All debtors must participate in credit counseling unless an exception applies. Exceptions include physical disability, mental incapacity, or the debtor's service on active duty in a military combat zone. When counseling has concluded, the debtor will receive a certificate of completion to submit to the bankruptcy court when filing.
6. The Debtor Defrauded Creditors
A bankruptcy court may dismiss a bankruptcy case if it appears that the filer has attempted to defraud creditors. The following types of actions by a debtor within a certain time period before filing for bankruptcy may indicate fraud in the court's eyes:
- The debtor transfers property to friends and family members
- The debtor mutilates or destroys property
- The debtor purchases luxury items
- The debtor lies about income, tax returns, and debt on a credit application
A filer signs bankruptcy papers under penalty of perjury. Providing false information may not only lead to dismissing a debtor's case. It may also lead to charges of perjury or fraud on court.
Before You File for a Chapter 7 Bankruptcy Petition, Speak With a Bankruptcy Lawyer
Filing for bankruptcy is a serious process that may affect your credit score and stay on your credit report for over ten years. Are you stuck in debt but do not know how bankruptcy basics work? Not sure how or when you can pull yourself out for a fresh start? This all seems overwhelming, but it doesn't have to be. Without understanding bankruptcy forms and the Bankruptcy Code, you may not get the most desirable results.
An attorney can:
- Ensure you meet all of your deadlines with the bankruptcy trustee
- Review what types of debts are non-dischargeable
- Help prepare you for your meeting of creditors
- Assist you in attempting to prevent foreclosure
- Point out nonexempt assets, nonexempt property, and unsecured debt you may have
Before you pay your filing fee, regardless of whether you choose to pay in installments, contact a local bankruptcy attorney to help you with your Chapter 7 bankruptcy case.
- Reasons to File for Chapter 7 Bankruptcy Instead of Chapter 13
- Is Chapter 7 Bankruptcy the Right Option for You?