What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, often referred to as a “liquidation bankruptcy,” involves gathering and selling non-exempt assets. The proceeds from these assets are distributed to unsecured creditors. Unlike Chapter 13 bankruptcy, which relies on your income to repay creditors, Chapter 7 uses the value of your non-exempt property to settle debts.
Who Qualifies for Chapter 7 Bankruptcy?
Not everyone is eligible to file for Chapter 7 bankruptcy. Your income and expenses will be evaluated to determine if your earnings fall below the median income level for your state (Kansas or Missouri, for example). Even if your income exceeds the median, you may still qualify after taking into account allowable deductions.
For more details on eligibility, check out our Bankruptcy FAQ. The experienced attorneys at Bloom Legal Advisors will review your financial situation, help you determine which type of bankruptcy is best for you, and advise whether your property is exempt.
Located in the Kansas City area, our bankruptcy attorneys are here to guide you through the decision-making process. Contact us today to schedule a free bankruptcy consultation by calling or emailing our office. Let us help you take the first step toward financial relief!
What Debts are NOT Discharged in Chapter 7 Bankruptcy?
Although Chapter 7 provides relief from many debts, certain obligations are typically non-dischargeable, including:
- Child support, alimony, and other domestic court orders
- Student loans (except in rare cases)
- Debts obtained through fraud, false representation, or intentional misrepresentation
- Luxury purchases exceeding $800 made within 90 days of filing
- Cash advances over $1,100 taken within 70 days of filing
- Personal injury claims resulting from intoxicated driving
- Criminal fines and restitution
- Debts from willful or malicious injury to another person or their property
- Certain tax debts and obligations to government entities
- Traffic and parking tickets
- Debts related to divorce or separation agreements, excluding child support or alimony
- Debts incurred to pay off non-dischargeable debts
The Chapter 7 Means Test
One of the most important questions is whether you qualify for Chapter 7. In most consumer cases, qualification begins with the Means Test.
The Means Test is designed to determine whether a person’s income is low enough for Chapter 7 or whether they may have enough disposable income to repay at least some debt through a Chapter 13 repayment plan. It is not simply a review of your current paycheck. The calculation generally examines your average income during the six full calendar months before filing.
Step One: Comparing Income to the State Median
The first part of the Means Test compares your household’s current monthly income, calculated from the prior six months, to the median income for a household of your size in the applicable state.
If your income is below the applicable median, you will often qualify for Chapter 7 without completing the more detailed expense calculation. Being below median does not automatically guarantee that Chapter 7 is appropriate, because asset protection, eligibility rules, and case-specific facts still matter. However, it is generally a strong starting point.
If your income is above the state median, you may still qualify. You will typically need to complete the second part of the Means Test.
Step Two: Allowable Expenses and Disposable Income
The second part of the Means Test considers certain permitted deductions and expenses. Some are based on standardized amounts, while others may reflect actual costs or debt payments. Depending on your circumstances, the calculation may account for items such as:
- Housing and utility allowances
- Food, clothing, and other household expenses
- Health insurance and out-of-pocket medical costs
- Taxes and mandatory payroll deductions
- Childcare and certain education expenses
- Secured debt payments, such as a car loan or mortgage
- Priority obligations, including some taxes or domestic support obligations
- Transportation costs
- Certain other necessary expenses
The calculation is intended to determine whether enough disposable income remains to create a presumption that Chapter 7 would be an abuse of the bankruptcy system. The forms use defined allowances for living expenses and payments on secured and priority debts in assessing whether income may be available for unsecured creditors.
Importantly, an above-median income does not mean you cannot file Chapter 7. The result can be affected by household size, payroll deductions, car payments, mortgage costs, taxes, medical expenses, support obligations, and other permitted deductions. There are also situations in which someone may claim an exemption from the presumption of abuse or show special circumstances.
Because the Means Test is technical and mistakes can affect your case, it is wise to speak with a bankruptcy attorney before deciding that your income is “too high” for Chapter 7.
