Do I Qualify for Chapter 7 Bankruptcy?

Chapter 7 bankruptcy provides relief from debt by wiping out most unsecured debt and giving the debtor a fresh start. An unsecured debt has no collateral. If you don't pay, the creditor can't take back your purchase or otherwise take your property without court approval.

But not everyone qualifies for Chapter 7 bankruptcy. To file a Chapter 7, potential debtors must meet eligibility requirements designed to discovery if the debtor has enough disposable income (gross income minus necessary expenses) to make a meaningful payment toward reducing debt. Other requirements are designed to steer potential debtors away from Chapter 7 toward Chapter 13 or no bankruptcy at all.

In this article, you'll learn about the main requirements you'll need to meet before qualifying for Chapter 7 bankruptcy relief.

Qualify for Chapter 7 After an Earlier Bankruptcy

You can wipe out debts only so often, so if you've filed for bankruptcy before, you'll need to determine whether enough time has passed to file again. Here's how it works.

If you filed a previous Chapter 7 petition and received a discharge, you must wait eight years from the filing date of the prior bankruptcy before filing another one. If you filed a previous Chapter 7 case but didn't complete it and didn't receive a discharge, you can file a new Chapter 7 at any time, provided the court in the previous case didn't bar you from filing again (and you otherwise qualify for Chapter 7).

If you previously filed and received a discharge in a Chapter 13 bankruptcy case, you must wait six years from the date you filed the Chapter 13 before filing for Chapter 7. If you did not complete or receive a discharge in the previous Chapter 13 case, you can file a Chapter 7 case at any time, assuming you otherwise qualified for Chapter 7.

Find out more information about the frequency with which you can file for bankruptcy.

Qualify for Chapter 7 After Prebankruptcy Credit Counseling

Before you file for Chapter 7 bankruptcy, you must complete a prebankruptcy credit counseling course conducted by an approved agency. You must complete this course within six months before the date you file for bankruptcy. Once the counseling session is complete, if the counselor decides that you would benefit from filing Chapter 7 bankruptcy more than by working with a credit counselor, the counselor will issue a certificate for you to file with the court. You must also complete a debtor education course after you file your case.

Learn about the differences between the credit counseling and debtor education requirements in bankruptcy.

Qualify for Chapter 7 Bankruptcy by Passing the Means Test

Many bankruptcy debtors must pass a "means test" to qualify for Chapter 7 bankruptcy. The means test is designed to determine whether you have "the means" (the ability) to pay at least a portion of your unsecured creditors, like credit card issuers and bills from doctors. . The means test compares your average monthly income for the six months preceding your bankruptcy against the median income of a similar household in your state. The median means that in your state, there are as many households with a higher income as there are households with a lower income. It is a midpoint, similar to an average. If

Because they are based on actual income figures, the median varies from state to state. You can check whether your gross income automatically qualifies you for Chapter 7 by reviewing the most current figures posted on the U.S. Trustee Program webpage.

If your income is too high, the result of the means test is a "presumption" that you have a significant amount of disposable income each month that you could devote to a Chapter 13 repayment plan.

Some debtors are not subject to the means test as a qualification for filing Chapter 7. These debtors are exempted:

• Your income is below the median in your state.
• You file Chapter 13 (although you will be subject to a similar calculation that helps to determine your disposable income, if any).
• You are a disabled veteran who accumulated most of the debt while on active duty or performing a homeland defense activity.
• You are a military reservist or a National Guard member called to active duty after September 11, 2001.
• At least half of your debts are non-consumer. Some examples of non-consumer debt include:
  • Business debts
  • Taxes, including income taxes
  • Mortgages and loans on business property
  • Liabilities from accidents
  • Medical expenses

Qualify for Chapter 7 Bankruptcy If Your Income Is Above the Chapter 7 Bankruptcy Median

Many debtors worry that they won't qualify if their income is above the median allowed by their state. It isn't necessarily true. You'll have a second chance to qualify.

If your income is above the median, you'll take the second portion of the means test and deduct expenses from your income to determine whether you have any income remaining to repay creditors. Some of the expense figures are based on national averages, some local averages, and a few are the actual amounts you spend each month.

You'll find the national and local expense figures on the U.S. Trustee Program website, in the means test area.

If deducting all allowable expenses from your income results in little or no disposable income, you'll be eligible to receive a Chapter 7 discharge (provided you've met all criteria). If your expenses are less than your net income, resulting in a disposable income balance, you might not be entitled to a Chapter 7 discharge, because you're not using your disposable income to pay down your credit balances ("presumption of abuse" arises.)

But the presumption of abuse won't prohibit filing Chapter 7 if you have special circumstances that a judge would find sufficient to overcome the presumption.

If you'd like to try your hand at the means test yourself, you can use the official means test form to get a rough idea whether you have disposable income. Keep in mind that the form is not as straightforward as it seems. It might not be obvious to you as to what income and expenses to include, what income and expenses to exclude, and how to account for out-of-the-ordinary entries and special circumstances.

The best way to get an accurate determination of your qualification chances is to speak with an experienced bankruptcy attorney. You can also learn more by reading how to qualify for Chapter 7 when your income is high.