Recently on our bankruptcy forum a user asked, “I have over $35,000 in credit card debt. I have $50,000 in medical bills. I also have an outstanding student loan. I am wondering if I can file Chapter 7 bankruptcy. If so, what will Chapter 7 do for me and how does the court determine whether I qualify? I have heard it’s gotten more difficult to file over the last ten years or so.”
Overview of Chapter 7 bankruptcy laws
Chapter 7 bankruptcy allows qualifying debtors to discharge certain unsecured debts. It is, however, called a liquidation bankruptcy, which means it allows a court-appointed trustee to accumulate your nonexempt assets and sell them to generate funds to repay certain creditors.
Even with the prospect of liquidating certain assets, however, Chapter 7 bankruptcy is often preferable to Chapter 13 bankruptcy because it allows for the immediate discharge or unsecured debts, as opposed to having to repay a portion of the debt under Chapter 13.
What bankruptcy laws affect debtors?
You mentioned that filing Chapter 7 bankruptcy has become more difficult. This is true. Starting in 2005 with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (Pub.L. 109–8, 119 Stat. 23, enacted April 20, 2005) certain requirements were added that made it much more difficult for certain high income earners to file Chapter 7.
This brings us to the second part of your question. You asked what would be the main factor the court would use to determine whether you qualify to file Chapter 7. The answer is your income.
How does my income determine my Chapter 7 bankruptcy eligibility?
In an effort to pacify certain creditors, lawmakers updated bankruptcy law to restrict certain high income debtors from filing Chapter 7. Prior to the Act all debtors could file Chapter 7. After the passage of the Act, however, only those who met specific criteria qualify.
Now, debtors can only file Chapter 7 bankruptcy if their income is less than the median income of their state. If not, the debtor has to pass additional mean’s testing. Specifically, if the debtor’s current monthly income for the six-months prior to filing bankruptcy is more than the statutory minimum then it’s assumed that the debtor has enough extra money to repay unsecured creditors, thus eliminating their right to file Chapter 7 bankruptcy.
Is filing Chapter 7 bankruptcy a good idea?
You did not mention whether you have a high income or not, but regardless of whether you can file Chapter 7 bankruptcy it’s also important to determine whether you should file for Chapter 7.
Before making this decision, you need to review whether you have any other options for repaying your debts (i.e. cutting expenses, creating a budget, consolidating your debt, etc.). Next, you need to determine whether your debt is dischargeable. For example, although your credit card debt and medical debt may be dischargeable, it’s much more difficult to get student loan debt discharged. Additionally, debts for secured assets such as a home or car are not discharged by filing Chapter 7.
Most debtors with a very low income will qualify for Chapter 7 bankruptcy. Whether it’s the right decision for them, however, will depend on a variety of other factors.
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