Chapter 7 bankruptcy is one of the most common options for individuals seeking to discharge unsecured debt, such as credit card debt and medical bills. However, not everyone qualifies for Chapter 7 bankruptcy, and there are specific requirements that must be met. Here’s what you need to know to determine whether filing for Chapter 7 bankruptcy is an option for you.
Requirements to File Chapter 7 Bankruptcy
To file a Chapter 7 bankruptcy, you must meet certain eligibility requirements based primarily on your income, debts, and previous bankruptcy filings. Here’s a breakdown of these criteria:
1. Income Requirements (Means Test)
Your eligibility to file for Chapter 7 bankruptcy is influenced by your income compared to the median income in your state for your household size. This is determined using a means test, which is designed to ensure that only those with insufficient income to repay debts can file Chapter 7. Here’s how it works:
- Income Below the Median: If your last six months of income are below the median income for your state and family size, you automatically qualify for Chapter 7 bankruptcy and don’t need to take the means test.
- Income Above the Median: If your income exceeds the median for your state, you’ll need to “pass” the means test. This involves calculating your disposable income after deducting allowable living expenses and secured debt payments. If you have enough disposable income, you may be required to file under Chapter 13 instead.
- Standard Living Expenses: The means test allows for deductions for necessary living expenses, such as housing, utilities, food, transportation, and healthcare.
- Secured Debt: Payments toward mortgages or car loans are also factored into the calculation.
2. Special Circumstances
There are some exceptions where the means test may not apply:
- Business Debts: If your debts are primarily from running a business, you may still qualify for Chapter 7 even if your income exceeds the median.
- Disabled Veterans: Disabled veterans whose debt was incurred during active duty may be eligible for Chapter 7 without having to pass the means test.
3. Previous Bankruptcy Filings
If you have filed for bankruptcy before, the timing of your previous filings can affect your eligibility:
- Previously Discharged Bankruptcy: If you received a discharge in a Chapter 7 case within the past 8 years, you generally cannot file for Chapter 7 again.
- Dismissed Cases: If your previous bankruptcy case was dismissed (for reasons like failure to comply with court orders or voluntary dismissal), it may affect your ability to file Chapter 7 in the future, particularly if the dismissal occurred within the last 180 days.
How Chapter 7 Works
If you are eligible to file for Chapter 7 bankruptcy, here’s how the process typically works:
- Automatic Stay: Once you file, an automatic stay goes into effect, immediately stopping most collection actions (garnishments, lawsuits, phone calls from creditors).
- Trustee Appointment: A bankruptcy trustee is appointed to oversee your case. The trustee will review your assets and debts, and may sell non-exempt property to pay creditors. However, many people are able to keep their home, car, and other essential property by using bankruptcy exemptions.
- Discharge of Debts: Most unsecured debts (credit cards, medical bills, personal loans) can be discharged, meaning you are no longer legally required to pay them.
When to Consider Chapter 7 Bankruptcy
Chapter 7 bankruptcy is usually a good option if:
- You are struggling with unmanageable debt, especially unsecured debts like credit cards or medical bills.
- Your income is below the state median, or you pass the means test.
- You don’t have significant non-exempt property that could be liquidated by the bankruptcy trustee.
- You need a fresh financial start without a long-term repayment plan (as required in Chapter 13).
Is Chapter 7 Bankruptcy the Right Choice for You?
While Chapter 7 bankruptcy can provide immediate relief from debt, it’s important to ensure it’s the best option for your situation. Chapter 13 bankruptcy, for example, may be a better choice if you have significant income, property to protect, or debts that are not dischargeable in Chapter 7.
To determine if Chapter 7 bankruptcy is right for you, schedule a free consultation with our Kansas City bankruptcy attorney today. We’ll evaluate your financial situation and guide you through the bankruptcy process.
