Who Can File for Chapter 7 Bankruptcy?

A bankruptcy filing can give you a fresh start and the chance to clear some of your unpayable debt. The purpose of bankruptcy is to discharge unsecured and secured debts that you cannot pay because your income is too low. The law does not permit people to erase debts they could pay with some better financial management. This article reviews some bankruptcy basics and who is eligible to file a Chapter 7 bankruptcy.

Chapter 7 Eligibility

A Chapter 7 bankruptcy, also known as a liquidation bankruptcy, erases almost all debt. After filing the bankruptcy petition, your property becomes the property of a bankruptcy trustee, who determines what you can keep and what you must sell to pay your creditors.

Not everyone can file a Chapter 7. The ones who may file are:

• Individuals and families who pass the means test
• Business entities except government-funded agencies

Not all debts are eligible for discharge in a Chapter 7. Some, such as student loans and child support arrearages, are not dischargeable in bankruptcy. The debts that qualify for Chapter 7 discharge include:

• Personal liability of secured car loans
• Past-due credit card balances
• Medical bills
• Other personal debt

Car loan debt is dischargeable, but that doesn’t mean you’ll always get to keep it. Since the lender has a lien, they may take back the vehicle unless you make new payment arrangements.

The Chapter 7 Means Test

To be approved for a Chapter 7 bankruptcy, you’ll have to pass the means test. The bankruptcy means test determines whether your income is low enough to file Chapter 7. Let’s take a look at the two steps involved in determining eligibility.

Step 1: Compare Your Income to State Median

Calculate your “current monthly income,” which is the average of your income over the six months before filing. Compare it to your state’s median income for your household size.

Each state’s median and monthly incomes differ. The amount changes annually based on IRS and U.S. Census Bureau data. If your monthly income is below your state’s median income, you automatically qualify for Chapter 7.

For the means test, income includes any or all of the following:

• Wages, salary, tips, bonuses, overtime
• Business income (gross)
• Rental income
• Regular child support or alimony received
• Pension and retirement income
• Unemployment compensation

Social Security benefits and tax refunds are not included in the income calculation.

Step 2: Calculate Disposable Income (if Above Median)

If your income exceeds the state median, you can still qualify for a Chapter 7. You must show that, after your living expenses are deducted, your disposable income is not sufficient for you to pay your debts. Allowable living expenses include:

• Housing and utilities
• Food and clothing
• Transportation
• Health insurance
• Childcare
• Court-ordered payments (child support, alimony, etc.)
• Taxes

For example, let’s say Maria’s monthly income is $6,000, which is above the state median in her area. Her allowed expenses total $5,800, leaving her with $200 per month in disposable income. Depending on the threshold in her state, Maria may or may not qualify for Chapter 7.

Before October 17, 2005, it was up to a bankruptcy judge to decide whether a debtor met the Chapter 7 requirements. Judges could use substantial discretion when assessing the debtor’s financial situation. Under the old law, most filers chose to have the debt discharged even if they were financially able to repay it in a Chapter 13 repayment plan. Current bankruptcy law is intended to weed out filers who can afford to repay some of their debt.

Who Cannot File for Chapter 7?

Chapter 7 is not available for everyone. Even if you want to file Chapter 7, you may be ineligible in certain situations. These include:

Your Income Is Too High

If a filer’s income is more than their state’s median income, the court looks at how much disposable income the filer has left after paying “allowed” monthly expenses. If the filer can pay some of their unsecured creditors through a Chapter 13 repayment plan, the court will dismiss the Chapter 7. The debtor can make debt payments in a Chapter 13 plan.

You Had a Recent Bankruptcy Discharge

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 discharge. The time limitation runs from the filing date of the previous bankruptcy. If you paid off 100% of your unsecured debts in your Chapter 13 repayment plan, or 70% in good faith, this exception will not apply.

You Had a Recent Bankruptcy Dismissal

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

Other reasons may also cause a dismissal.

You Haven’t Completed Mandatory Credit Counseling

Within 180 days before filing for Chapter 7, all debtors 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 options other than bankruptcy are available. Exceptions include physical disability, mental incapacity, or the debtor’s service on active duty in a military combat zone.

Chapter 7 vs. Chapter 13

There are many similarities between a Chapter 7 and Chapter 13 bankruptcy, but you can only file 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. There are exceptions to the means test for:

• Disabled veterans filing to eliminate debt gained while on active military duty
• Filers with debt that primarily came from operating a business

A Chapter 13 allows you to keep most of your property. A Chapter 7 requires liquidation of all your nonexempt property. A bankruptcy lawyer can explain the difference and help you decide which type of bankruptcy would work better for you.

When It’s Important To Get Legal Help

Determining whether you qualify for Chapter 7 can be complex. You should talk to an attorney if:

• You have a complex income situation (self-employed, irregular income, recent job loss) that may cause difficulties with the means test calculation
• You’re close to your state’s income median
• You recently transferred assets to family or friends or sold property, which can trigger allegations of fraud.
• You’ve filed for bankruptcy before or had a previous case dismissed, and aren’t sure if enough time has passed
• You recently moved to a different state and aren’t aware of the exemptions
• You’re facing immediate foreclosure or repossession

An attorney can help you determine whether you pass the means test, maximize your allowed expenses, and ensure you meet all the eligibility requirements. They can also advise you on alternatives if you don’t qualify for Chapter 7. Before you pay your filing fee, contact a local bankruptcy attorney to help you with your Chapter 7 bankruptcy case.