For years, Chapter 7 bankruptcy has been the most popular bankruptcy to file. It is considered a liquidation bankruptcy, allowing debtors to sell certain assets and use the proceeds from the sale to repay their creditors. Dischargeable, unsecured debts which remain after the liquidation of the assets are generally discharged.
In 2005, however, bankruptcy laws were passed which made it much more difficult for certain filers to qualify for Chapter7 bankruptcy. Proponents of the law argued that the updates were needed to eliminate certain debtors from abusing bankruptcy laws and discharging debts they could afford to pay.
Opponents of the law argued that this was passed to appease creditors, particularly credit card businesses which could receive more than a billion dollars in repayments as high income debtors were forced to file Chapter 13 bankruptcy and repay a portion of their debts.
Recently on our bankruptcy forum a user asked, “I am planning on filing bankruptcy but was told I would not qualify for Chapter 7 and would instead have to file Chapter 13. What does this mean for me and what will I have to do now?”
Means test and Chapter 7 bankruptcy
Bankruptcy laws have been updated to require debtors to take a credit counseling course within six months before applying for bankruptcy. They also must take a debt management course prior to their bankruptcy discharge.
But one of the most significant changes of the bankruptcy laws was the limitations on who could file for bankruptcy protection. Gone are the days when a judge would make the determination whether a debtor could file bankruptcy, and it was relatively easy for many debtors to qualify for Chapter 7.
After Congress passed the Bankruptcy Protection Act of 2005, lenient and inconsistent standards were eliminated and debtors now have to pass a bankruptcy means test to qualify for Chapter 7 bankruptcy.
Determining your Chapter 7 Eligibility with the Means Test
Determine if your income is below the state’s median average income.
The first step to determine whether you can file Chapter 7 is to compare your average monthly income for the six months before filing for bankruptcy to other families of equal size in your state. If your median income is lower than the median income, you can file Chapter 7 bankruptcy (In some cases, the bankruptcy court may later determine you have sufficient income to repay your debts and convert your case to a Chapter 13 bankruptcy case).
Determine if you have sufficient disposable income to repay your creditors.
If your income is too high to automatically file Chapter 7 bankruptcy you will have to complete additional means testing to determine your eligibility. In this test you will determine whether your disposable income is sufficient to pay a portion of your unsecured debt.
The calculations vary by state, county, and metropolitan due to varying allowable amounts for different expenses. Find an online calculator to determine your eligibility. If you fail the means test but file Chapter 7 anyway, you may be able to fight a motion to convert your case to a Chapter 13 case if you can show there are special circumstances (i.e. recent unemployment, high rent, or a serious medical condition) which may impede your ability to repay creditors.
If the motion is denied or you fail the means test and decide to file Chapter 13 bankruptcy, you will be allowed to create a 3 or 5 year debt repayment plan to repay a portion of your debts.
Means Test Bottom line:
Debtors may be unable to file Chapter 7 bankruptcy if their income is too high, they fail the means test, and the court believes they can repay a portion of their unsecured debts.
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