Given the increased eligibility requirements for filing Chapter 7 bankruptcy not all filers will have a choice of whether or not to file Chapter 7 or Chapter 13. Recently on our bankruptcy forum a user asked, “I was told that my income was too high to file Chapter 7 bankruptcy. What does this mean and what are my bankruptcy options?”
Filing Chapter 7 and income limits
In 2005 bankruptcy laws were tightened, making it more difficult for many families with certain incomes to file and discharge their unsecured debts. For example, new income tests require you to determine if your income in the six months prior to your bankruptcy filing is higher than the median income for a similarly sized family within your state. If it is not, you are eligible to file Chapter 7 bankruptcy. If it is, other means tests are done to determine if you have enough disposable income to repay a portion of your debts within five years.
Means Testing and Chapter 7 Bankruptcy
Unfortunately, if your income is higher than your state’s median income the test gets a bit more complicated. First, you must determine your disposable income, which is the income you have after your allowable expenses are paid. The disposable income is what you could use to pay some of your unsecured debts, including your credit card bills and medical debts.
Now, if you determine your disposable income is equal to or more than a minimum amount set by law, you will be barred from filing Chapter 7 bankruptcy and must file Chapter 13, which requires you to repay a portion of your unsecured debts.
The good news is there are means test calculators which make the calculation much easier. You can either find one of these online or talk to a lawyer to determine your eligibility for filing Chapter 7 bankruptcy.
Filing Chapter 7 bankruptcy
Assuming you do qualify for Chapter 7 bankruptcy, however, the next step is to file all of the bankruptcy forms and the petition with the appropriate bankruptcy court. An automatic stay will be initiated by the court, and a court trustee will be assigned to your case. The trustee will have the legal right to take qualifying assets and sell them to repay your debts. After the assets are liquidated and your creditors are paid, all remaining, qualifying, unsecured debts will be discharged.
Filing Chapter 13 bankruptcy
If, however, you do not qualify for Chapter 7 bankruptcy you can file Chapter 13 bankruptcy. The first step is to file the appropriate petition and forms with the appropriate court. The assigned trustee will not liquidate your property but will instead work with you to manage your debt repayment plan. Chapter 13 bankruptcy differs from Chapter 7 bankruptcy and will not immediately discharge unsecured debts, but it may allow you to keep certain property, stop foreclosures, stop property repossessions, and stop certain wage garnishments.
So while bankruptcy laws have made it more difficult for some debtors to file Chapter 7 bankruptcy, some filers may find that Chapter 13 bankruptcy is still an option and will allow them to retain their property while repaying a portion of their unsecured debts.
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