In order to be eligible for Chapter 7 bankruptcy, you must meet several criteria. Your income cannot be over a certain amount, and if it is, you must pass the “means test.” In addition, the court will dismiss your case if you have filed a previous bankruptcy within a certain period of time, or if the court believes you are cheating your creditors. Here we will explain the situations in which you won’t be eligible to file for Chapter 7 bankruptcy.
The Debtor’s Income is Too High
Eligibility for Chapter 7 requires a determination of whether a filer’s income is too high. The “means test” determines whether a debtor qualifies for Chapter 7. The first part of the test requires the debtor to compare their current monthly income — the average income in the six months preceding the application for bankruptcy — with their state’s median income.
Eligible monthly income includes the following:
- wages, salary, tips, bonuses, overtime, and commissions
- gross income from a business, profession, or a farm
- interest, dividends, and royalties
- rents and real property income
- regular child support or spousal support
- unemployment compensation
- pension and retirement income
- workers’ compensation
- annuity payments
- state disability insurance
A filer does not have to include income tax refunds and payments from Social Security retirement benefits.
If the filer’s current monthly income is equal to or below the state’s median, then the debtor can file for Chapter 7. If, on the other hand, the filer’s income exceeds their state’s median family income, the filer must pass the second part of the means test to qualify for Chapter 7.
The Filer Can Repay Some Debt
If a filer’s income is more than their state’s median income, it is necessary to look at how much disposable income the filer has left after paying “allowed” monthly expenses, such as rent and food, to determine whether the filer has enough money to pay some of their unsecured creditors through a Chapter 13 repayment plan. If the filer has a certain amount of income left over to pay some unsecured creditors, then the court will dismiss the Chapter 7 filing.
Debt was Previously Discharged in Bankruptcy
If a filer discharged debt under a Chapter 7 bankruptcy within the past eight years or under a Chapter 13 bankruptcy within the past six years, then the debtor is ineligible for Chapter 7. The time limitation runs from the date when the debtor filed for the previous bankruptcy.
A Previous Bankruptcy Case was Dismissed within the Previous 180 Days
A filer is ineligible if the dismissal of a previous Chapter 7 or Chapter 13 bankruptcy case occurred within the past 180 days for any of the following reasons:
- The filer violated a court order
- The previous bankruptcy case was considered fraudulent or constituted abuse on the court
- The filer requested a dismissal after a creditor asked the court to lift the automatic stay
The Debtor Failed to Meet the Credit Counseling Requirement
Within 180 days prior to filing for Chapter 7, a debtor must participate in credit counseling with a nonprofit agency approved by the U.S. Trustee’s office. The purpose of credit counseling is to help the debtor determine whether other options besides bankruptcy are available. All debtors must participate in credit counseling unless an exception applies. Exceptions include physical disability, mental incapacity, or the debtor’s service on active duty in a military combat zone. When counseling has concluded, the debtor will receive a certificate of completion to submit to the bankruptcy court when filing.
The Debtor Defrauded Creditors
A bankruptcy court may discharge a bankruptcy case if it appears that the filer has attempted to defraud creditors. The following types of actions by a debtor within a few years of filing for bankruptcy may indicate fraud in the court’s eyes:
- The debtor transfers property to friends and family members
- The debtor mutilates or destroys property
- The debtor purchases luxury items
- The debtor lies about income and debt on a credit application
A filer signs bankruptcy papers under “penalty of perjury,” so providing false information may not only lead to the dismissal of a debtor’s case, but may also lead to charges of perjury or fraud on the court.
There’s no question that deciding whether to declare bankruptcy is very difficult. It affects your future credit, your reputation and your self-image. It can also improve your short-term quality of life considerably, as the calls and letters stop. Here is a list of pros and cons to consider as you decide whether Chapter 7 bankruptcy is the best option for you.
| CONS | PROS | |
| Bankruptcy will ruin your credit for some time to come. A Chapter 7 bankruptcy can remian on your credit report for up to 10 years. | Although a bankruptcy stays on your record for years, the time to complete the bankruptcy process under Chapter 7, from filing to relief from debt, takes only about 3-6 months. So, the trade-off is a lasting mark against your credit in exchange for freedom from most debt. If you decide against Chapter 7 when it may be the right decision for you, your missed debt payments, defaults, repossessions, and lawsuits will also hurt your credit, and may be more complicated to explain to a future lender than bankruptcy. | |
| You will lose property that you own that is not exempt from sale by the bankruptcy trustee. You may lose some of your luxury possessions. | Most state exemptions allow you enough so that most things you own will be exempt from bankruptcy, sometimes allowing more coverage to keep your property than you need. Additionally, you will get to keep the salary or wages you earn and the property you buy after you file for Chapter 7. | |
| You will lose all your credit cards. | Your credit cards probably got you in this mess to start with, so it’s hard to see that as a bad thing. You may also be able to obtain new lines of credit within one to three years of filing bankruptcy, although at a much higher interest rate. | |
| Bankruptcy will make it nearly impossible to get a mortgage, if you don’t already have one | There are lenders who specialize in lending to “bad risks,” although that is an unfair characterization to make of someone who has taken a major step to solve financial difficulties. | |
| Declaring bankruptcy now might make it harder to do later if something worse comes along. For instance, if you complete the bankruptcy process under Chapter 7, you cannot file for another Chapter 7 bankruptcy for six years. The six years is counted from the date you last filed for bankruptcy. | Declaring bankruptcy now can get you started sooner on rebuilding your credit. Although, you can only file under Chapter 7 once every six years, you can always get a Chapter 13 plan if there is another disaster before you are entitled to file for Chapter 7 again. You may file for a Chapter 13 plan repeatedly, although each filing appears on your credit record. | |
| Bankruptcy will not relieve you of your obligations to pay alimony and/or child support. | Short of a court order from family court, nothing else will relieve you of your alimony and child support obligations. At least bankruptcy will alleviate many of your other financial obligations | |
| Bankruptcy will not get rid of your student loan debt. | Nothing will get rid of student loan debt, and at least bankruptcy will prevent your lenders from aggressive collection action. | |
| You will have to explain to a judge or trustee how you got into a financial mess. | Both judges and trustees have heard far worse stories than yours. | |
| You cannot file for Chapter 7 bankruptcy if you previously went through bankruptcy proceedings under Chapter 7 or Chapter 13 within the last six years. | If, however, you obtained a Chapter 13 discharge in good faith after paying at least 70% of your unsecured debts, the six-year bar does not apply. | |
You cannot file for Chapter 7 bankruptcy if a previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days because:
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You can avoid these harsh limitations against refiling for bankruptcy by observing all court orders and court rules, and by not asking to have your case dismissed when a creditor asks for relief from the stay. Even if these limitations apply to you, they don’t last forever. You’re only prevented from refiling for six months. It may make sense to at least consult with an attorney prior to filing for bankruptcy to avoid limiting your bankruptcy options in the future. | |
| You may still be obligated to pay some of your debts, such as a mortgage lien, even after bankruptcy proceedings are completed. | If you don’t owe money on the type of debts that survive bankruptcy, the amount and number of debts that a bankruptcy court can relieve you from paying is potentially unlimited. | |
| If you file for Chapter 7 relief, but you have a certain amount of disposable income, the bankruptcy court could convert your Chapter 7 case to a Chapter 13, thus changing your plan to be free from most debts within four to six months, to a plan requiring you to repay your debts over the course of three to five years. | Chapter 7 does not require that you have debts of any particular amount in order to file for relief. However, even if your case gets converted to Chapter 13, it can still improve your financial situation by obtaining more favorable terms to pay off your debts. With Chapter 13, you get to keep all of your property as well. |
Bankruptcy – Next Steps
Every tax case is different, but EVERY case has a solution. We can help you figure out if declaring bankruptcy is the best solution to settle your debts. Call us.
