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Ch. 7 Bankruptcy: Who Can File

Chapter 7 bankruptcy eligibility requirements were changed significantly when the Bankruptcy Abuse Prevention and Consumer Protection Act was signed into law by President Bush in 2005. Before this law went into effect, it was generally left to bankruptcy judges to decide whether or not a debtor met the chapter 7 requirements. The rules were strengthened to make obtaining relief under Chapter 7 more difficult for debtors who can afford to make monthly payments, and they make determining eligibility a relatively straightforward process.

Under the rules introduced in 2005, debtors must have filed a federal tax return, meet certain income requirements and attend mandatory credit counseling sessions. Debtors who previously discharged debts under a Chapter 7 or Chapter 13 bankruptcy or who have had a bankruptcy case dismissed within a specified time periods may not be eligible to file a Chapter 7 petition, and new Chapter 7 petitions can be dismissed if bankruptcy courts believe that debtors are attempting to defraud their creditors.

Chapter 7 Bankruptcy Income Requirements

Debtors who earn less than the median income in their state will generally qualify to file a Chapter 7 bankruptcy. A list of the median incomes based on family size in all states is maintained by the U.S. Department of Justice. Qualification is determined by taking the debtor's average income over the previous six months and comparing it to state income figures for families of the same size. Average monthly income is calculated based on the following:

  • Income from employment such as salary, wages, tips, commissions, overtime and bonuses
  • Business or professional income
  • Interest, annuities, royalties and dividends from investments
  • Real estate rents and other property-related income
  • Child or spousal support
  • Unemployment benefits
  • Workers' compensation and state disability payments
  • Veterans benefits

The Chapter 7 Means Test

Those who earn more than the median income of similar-sized families in their state can still file Chapter 7 bankruptcies if they are able to pass the Chapter 7 means test. The test is designed to determine how much disposable income debtors have after paying their expenses, and even those earning significant incomes may be able to pass it if they do not have enough money left over each month after covering their bills to pay at least a portion of their unsecured debts.

Most of the expenses used for performing the means test are based on national or local standards rather than the debtor's actual costs. This prevents the bankruptcy system from being abused by debtors who spend extravagant amounts on clothing or other items. Documents reflecting the true amounts paid by debtors may be submitted for the following expenses:

  • Taxes and other involuntary deductions such as union dues or retirement plans
  • Life, health and disability insurance contributions
  • Payments made on secured debts like mortgages and car loans
  • Court-ordered alimony or child support payments
  • Babysitting and other child care expenses
  • Education expenses relating to work or the care of a disabled child
  • Donations to charity
  • Care for an elderly, disabled or sick family member

Bankruptcy courts may allow other expenses to be considered in special circumstances, and disabled veterans who incurred the debts included in their Chapter 7 petitions while on active duty or performing homeland security assignments are exempt from the means test.

Mandatory Credit Counseling

The purpose of Chapter 7 credit counseling is to find out whether or not there are any feasible ways for debtors to meet their financial obligations without filing for bankruptcy or taking on more debt. The U.S. Department of Justice provides a list of nonprofit credit counseling agencies that have been approved to provide this service. Many of the people who file Chapter 7 petitions each year are struggling to cope with wholly unmanageable financial situations, but even they must undergo mandatory credit counseling no longer than 180 days before filing a Chapter 7 bankruptcy.

Credit counseling sessions generally include a summary of the debtor's income and expenses and a review of the options available. Once the session has been concluded, a certificate of completion is issued to the debtor that must be filed no later than 15 days after submitting a Chapter 7 petition.

Previous Bankruptcies

Debtors who obtained relief under a Chapter 7 bankruptcy within the last eight years or a Chapter 13 bankruptcy within the last six years may not file a Chapter 7 petition. People may also be ineligible if a Chapter 7 or Chapter 13 petition filed by them has been dismissed within the past 180 days because a court order was violated, they asked the court for a dismissal after one or more of their creditors asked for an automatic stay to be lifted or the court determined that the petition was fraudulent or designed to abuse the bankruptcy system.

Attempts to Defraud Creditors

Bankruptcy courts may dismiss Chapter 7 petitions when the evidence suggests that debtors are attempting to defraud their creditors. Such evidence could include transferring assets to family members or friends, destroying or damaging property and uncharacteristically high spending on non-essential items during the preceding weeks or months. Debtors sign Chapter 7 petitions under penalty of perjury, and their cases may be dismissed if the court learns that they have provided false or misleading information about their assets, income or expenses.

Bankruptcy courts sometimes order Chapter 7 petitions to be converted to Chapter 13 cases. This is usually done when debtors have failed the means test or forgotten to mention certain assets or sources of income. However, debtors can choose to forego a Chapter 13 petition and select instead to have their cases dismissed.

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