Understanding Chapter 7 Bankruptcy Eligibility

Discover the requirements for Chapter 7 and the implications of the “means test” on your ability to file.

Pursuing Chapter 7 bankruptcy can offer a fresh start by addressing burdensome debt. Nonetheless, not everyone qualifies for this form of relief. Below are the conditions under which you may be ineligible to file for Chapter 7.

The Viability of a Chapter 13 Repayment Plan

Previously, the determination of whether a debtor could embark on Chapter 7 bankruptcy rested with the bankruptcy judge and varied based on the specifics of each case. Today, the revamped bankruptcy legislation clearly outlines who may proceed with Chapter 7 and who may need to consider Chapter 13 if they wish to pursue bankruptcy—exceptions include disabled veterans whose debts arose during active duty and individuals whose fiscal burdens predominantly stem from business operations. All other individuals must satisfy the following stipulations.

Evaluating Your Income Level

The newly enacted rules require you to compare your “current monthly income”—an average of your last six months’ income, excluding Social Security retirement and disability benefits—to the median income for a household of your size in your state. If your financial earnings are at or below the median, qualifying for Chapter 7 is straightforward. Surpassing the median income, however, necessitates a pass in the so-called “means test.”

The Means Test: Qualification Criteria

The means test is designed to assess your ability to pay off some unsecured debts with your disposable income over a five-year timeframe. The calculation begins with your “current monthly income,” from which you deduct:

• Specified expenses as mandated by the IRS (generally, not your actual expenditures but rather standardized IRS allotments for necessities, which may be lower than your area’s cost of living)
• Obligated payments on secured and priority debts (secured debts being those that creditors can claim collateral for non-payment, and priority debts such as child support, alimony, tax obligations, and wages due to employees)

Should your remaining monthly disposable income total less than a certain floor, you pass the means test, qualifying for Chapter 7. Over a specified ceiling indicates a fail, disallowing the use of Chapter 7, unless you demonstrate “special circumstances” that adjust your income or augment your expenses, dropping your disposable income below the ceiling.

For those with leftover monthly disposable income between the floor and the ceiling, further calculations are required. Essentially, if this amount can cover more than 25% of your nonpriority, unsecured debts across five years, Chapter 7 is unattainable—unless “special circumstances” apply.

Restrictions Following a Prior Bankruptcy Discharge

You are precluded from filing for Chapter 7 bankruptcy if your debts were discharged under Chapter 7 within the preceding eight years, or under Chapter 13 in the prior six years.

Implications of Recent Bankruptcy Dismissal

Chapter 7 bankruptcy filing is not an option if a prior case was dismissed within the past 180 days for reasons such as:

• Court order violations
• Court determinations of fraudulent activity or bankruptcy system abuse
• Dismissal requests post-creditor appeals against the automatic stay

Instances of Fraud Against Creditors

Court dismissal of your case may occur if deception towards creditors or asset concealment is suspected. Actions that could trigger this include:

• Transferring assets to relatives or friends to shield them from creditors or the bankruptcy process
• Accumulating luxury goods debt without the capacity to repay
• Withholding property or funds during divorce procedures
• Misrepresenting financial information on credit applications

Moreover, submitting bankruptcy documents under “penalty of perjury” requires complete honesty. Concealment of assets, omission of crucial financial details, or false Social Security number usage can lead to case dismissal and potential fraud charges.

For additional assistance or to understand your options concerning Chapter 7 bankruptcy, contact James H. Wilson at 804.740.6464. Our experienced team is committed to guiding you through the process and helping you achieve the financial fresh start you deserve.