Before 2005, it was left to the discretion of the individual bankruptcy judge to decide whether a debtor met Chapter 7 requirements. Therefore, the majority of bankruptcy filers opted to file under Chapter 7 and have most of their debts discharged. Many chose this route even if they were financially capable of repaying their debt under a Chapter 13 bankruptcy repayment plan.
Under the new law, a debtor must qualify for Chapter 7 by meeting certain criteria, mainly the “means test”. The first part of the means test requires the debtor to compare their current monthly income, the average income in the six months preceding the application for bankruptcy, with their state’s median income. If the debtor fails to meet Chapter 7 requirements, the court can convert the case to a Chapter 13 “reorganization” bankruptcy, wherein the debtor establishes a three-to-five-year plan with the approval of the court, to repay some, if not all, of his debts to his creditors.
Eligibility for filing Chapter 7 bankruptcy requires an evaluation of whether the filer’s income is too high. Eligible monthly income includes:
- 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
- Unemployment compensation
- Pension and retirement income
- Workman’s compensation
- Annuity payments
- State disability insurance
If the filer’s current monthly income is equal to or below the state’s median, then the debtor can file for Chapter 7. If, on the other hand, 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.
If a filer’s income is more than their state’s median income, to determine eligibility it is necessary to look at how much disposable income the filer has left after paying such normal monthly obligations as housing and food, 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 to pay some unsecured creditors, then the court will dismiss the Chapter 7 filing and change the case to a Chapter 13 bankruptcy.
If, within the past eight years, a filer discharged debt under a Chapter 7 bankruptcy or under a Chapter 13 bankruptcy within the past six years, the debtor is ineligible for Chapter 7.
A filer is also considered 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 previous bankruptcy case was deemed fraudulent or constituted abuse of the court
- The filer violated a court order
- The filer requested a dismissal after a creditor asked the court to lift the automatic stay
In another term of bankruptcy eligibility, a debtor must participate in credit counseling with a nonprofit agency approved by the U.S. Trustee’s office at least 180 days prior to filing for Chapter 7. This credit counseling will assist the debtor in determining whether options besides bankruptcy are available to offer financial relief. Exceptions to this rule include physical disability, mental incapacity or the debtor’s serving in active military duty in a combat zone.
If you want to speak with a bankruptcy representative from Client First Bankruptcy, please call us toll-free at 800-383-6004. Filing bankruptcy stops creditor harassment, so call us right now.