Do I Qualify for Chapter 7 Bankruptcy?

To qualify for Chapter 7 bankruptcy, your disposable income must be low enough to pass the means test.

Chapter 7 bankruptcy provides very thorough relief from debt by wiping out most unsecured debt and allowing the debtor to have a fresh start. To prevent consumers from abusing the system, however, Congress has provided eligibility requirements for filing a Chapter 7 case. Here are the main requirements to qualify for Chapter 7 bankruptcy relief.

(For more articles about Chapter 7 bankruptcy, including how it works and how to file, see our Chapter 7 Bankruptcy area.)

Prior Bankruptcies

If you filed a Chapter 7 petition and received a discharge in the past, you must wait eight years from the filing date of the previous bankruptcy before filing another one.

If you filed a previous Chapter 7 case but did not complete the case and did not receive a discharge, you may file a new Chapter 7 at any time, provided the court in the previous case did not bar you from filing again and you otherwise qualifies 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 that Chapter 13 was filed 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.

See Also: How Often Can You File for Bankruptcy?

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 prior to the date you file for bankruptcy. Once the counseling is complete, you will receive a certificate that you must file with the court.

See Also: Credit Counseling Requirement for Bankruptcy.

The Means Test

With the enactment of the Bankruptcy Abuse and Consumer Protection Act of 2005 ("BAPCA"), bankruptcy debtors are now required to pass a "means test" in order to qualify for Chapter 7 bankruptcy. Read on to learn more about whether you qualify to file for Chapter 7 bankruptcy.

For more information, see The Chapter 7 Means Test.

Passing the Means Test

In order to pass the means test, you must have little or no disposable income. To determine whether you qualify for Chapter 7 bankruptcy, the means test compares your average monthly income for the six-month period preceding your bankruptcy against the median income of a similar household in your state. If your income is below the median, you automatically qualify.

While the median income figures vary from state to state (my own location, Orlando, Florida, currently has a median income threshold of $41,065 for a household of one). In most cases, people who are having financial difficulties are making little or no income so the means test does not pose a problem.

Your Options If Your Income Is Above the Median

But what happens if your income is above your state's median? Many debtors think that such a scenario represents the endgame for them, that there is no way they can file a Chapter 7 bankruptcy with their income being so high. This is not necessarily true.

If your income is above median, you must complete the entire means test form instead of qualifying simply based on your income. The means test is essentially a balancing stage where your expenses are weighed against your income. But keep in mind that you can only use your actual expenses for certain items. For many expenses, the means test only allows you to deduct the national or local standard living allowance.

If deducting all allowable expenses from your income results in little or no disposable income, you can file for Chapter 7 bankruptcy. If your expenses are less than your net income, you probably cannot file a Chapter 7 (the "presumption of abuse" arises).

While this may seem simple enough to determine, bear in mind that the "value" of a given expense depends on a number of complicated formulas. For this reason, it is very important to speak with an experienced bankruptcy attorney before taking any course of action.

To learn more, see Can You Pass the Means Test If Your Income Is High?

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