Am I Eligible to File for Chapter 7 Bankruptcy?[yoast-breadcrumb]
Am I Eligible to File for Chapter 7 Bankruptcy?
Filing for bankruptcy can be a confusing process. With different chapters and eligibility requirements, it’s hard to know if you qualify for relief. This article focuses specifically on Chapter 7 bankruptcy and whether you meet the qualifications to file.
Chapter 7 bankruptcy, also called straight or liquidation bankruptcy, can eliminate many types of unsecured debt like credit cards, medical bills, personal loans, etc. But not just anyone can pursue Chapter 7 bankruptcy. Let’s break down the eligibility requirements and see if you might qualify.
Chapter 7 Bankruptcy Basics
In Chapter 7 bankruptcy, a trustee is appointed to oversee your case. They liquidate (sell) most of your assets to pay back as much debt as possible. The remaining unpaid debt is discharged, meaning you’re no longer legally obligated to pay it back.
However, you may get to keep certain assets like clothing, household items, and possibly a vehicle. The trustee won’t take property that is exempt under your state’s law. Every state has its own exemption laws listing property debtors can keep in bankruptcy.
While Chapter 7 wipes out many debts, some are non-dischargeable. This includes student loans, alimony, child support, and certain taxes. You’ll still owe these after bankruptcy.
Chapter 7 Eligibility Requirements
So how do you know if you qualify for Chapter 7 bankruptcy? Here are some of the main eligibility factors:
- You must undergo credit counseling from an approved agency within 180 days before filing.
- Your income must be below the median level for your state.
- You must pass the Chapter 7 means test.
- You can’t have filed Chapter 7 bankruptcy within the past 8 years.
- You can’t have filed Chapter 13 bankruptcy within the past 6 years.
- You must be an individual, not a business or partnership.
Let’s look at each requirement more closely:
Pre-Bankruptcy Credit Counseling
Before filing Chapter 7, you have to complete a credit counseling course with an approved agency. This session lasts around 90 minutes and covers topics like managing finances, budgeting, and bankruptcy alternatives. You can take the counseling online, over the phone, or in person.
The counseling has to be finished within 180 days before your bankruptcy filing. After completing the course, the agency gives you a certificate of completion. This certificate is required for the bankruptcy court.
Below Median Income
To file Chapter 7, your income must fall under the median level for households of the same size in your state. For example, the 2022 median income for a single person household in California is $63,282. So a single filer in California making below this amount could likely qualify for Chapter 7 assuming they meet the other requirements.
If your income exceeds the median, you may still be able to file Chapter 7 by passing the means test (more details below). You can find median income tables listing all 50 states on the U.S. Trustee’s website.
Passing the Chapter 7 Means Test
The Chapter 7 means test determines whether a filer with higher income can still qualify for liquidation bankruptcy. It looks at your average monthly income over the past 6 months and subtracts necessary living expenses.
If the remaining amount is below a certain threshold based on where you live, you pass the means test. This allows higher earners who have a lot of expenses to still file Chapter 7 bankruptcy.
The means test calculation is complex. Online calculators can help you run the numbers to see if you might pass. If you’re borderline, consider talking to a bankruptcy attorney who can review your specific situation.
Previous Bankruptcy Restrictions
You aren’t eligible for Chapter 7 bankruptcy if you’ve had any other bankruptcy discharge in the past:
- Chapter 7 discharge within last 8 years
- Chapter 13 discharge within last 6 years
The court wants to prevent abuse where debtors file again and again to wipe out debt. Waiting out the time restrictions helps ensure your situation is truly dire before granting another discharge.
Chapter 7 bankruptcy is only available for individuals, not businesses. Partnerships and corporations don’t qualify. However, sole proprietors and single member LLCs can file personal Chapter 7 to discharge business and personal debts.
Other Chapter 7 Restrictions
In addition to the main eligibility requirements, some other situations may prevent you from filing Chapter 7 bankruptcy:
- Previous case dismissed for failure to appear at court hearing or follow court orders
- Previous case voluntarily dismissed after creditor filed motion for relief from stay
- Evidence of abuse or improper actions evident in filings
- Debts are primarily from student loans or taxes
The court trustee will review each case carefully to identify any red flags of abuse. For example, if you racked up credit card debt right before filing, the trustee may investigate whether you were using the cards knowing you planned to file bankruptcy.
Alternatives to Chapter 7 Bankruptcy
If you don’t qualify for Chapter 7, all hope is not lost. You may still be able to file under Chapter 13 bankruptcy. This involves a 3-5 year structured repayment plan to pay back creditors over time. Chapter 13 has more flexible income limits.
Debt management plans and debt consolidation loans also provide alternatives to bankruptcy. Or you may be able to negotiate settlements on your own directly with creditors.
Chapter 7 bankruptcy offers a powerful way to eliminate debt for those who qualify. Review the eligibility criteria carefully to see if your situation meets the requirements. Speak to a bankruptcy attorney if you need help determining whether you can file.
With the right preparation, you can successfully navigate the Chapter 7 process and get a fresh financial start.
U.S. Trustee Means Testing Information