How to Check If You Qualify for Chapter 7 Bankruptcy[yoast-breadcrumb]
How to Check If You Qualify for Chapter 7 Bankruptcy
Figuring out if you can file for Chapter 7 bankruptcy can be confusing. There’s a lot of legal mumbo-jumbo involved. But don’t worry – this article will explain the basics in simple terms so you can understand if you might qualify.
First off, what is Chapter 7 bankruptcy? It’s a type of bankruptcy where your assets get liquidated to pay off as much debt as possible. Any remaining debt gets discharged, meaning you don’t have to pay it back. It’s basically a fresh start financially.
Now, not just anyone can file for Chapter 7. There are a few hoops you have to jump through first. The main one is the means test. Let’s break that down:
The Chapter 7 Means Test
The means test looks at your income and compares it to the median income for your state. If your income is lower, you pass the means test and can likely file for Chapter 7.
Here’s how it works step-by-step:
- Calculate your current monthly income. This is your average monthly income over the past 6 months.
- Find the median income for your state based on your household size. There are published tables you can reference.
- Compare your current monthly income to the median. If yours is lower, you pass the means test!
Pretty simple right? Now let’s look at some examples:
- John is single and makes $3,000 per month. The median income for a 1-person household in his state is $5,000. Since John’s income is lower, he passes the means test.
- Mary is married with 2 kids and makes $4,500 per month. The median for a 4-person household is $6,000 in her state. Mary also passes the test.
- Bob is single and earns $6,000 per month. The 1-person median is $5,000. Bob makes too much so he fails the means test.
In that last example, Bob may have to file for Chapter 13 bankruptcy instead, where he’d setup a repayment plan. But we’ll save that for another article!
Other Chapter 7 Qualifications
Passing the means test is the big one, but there are a few other hoops you may need to jump through:
- You can’t have filed Chapter 7 bankruptcy in the past 8 years
- You have to take a credit counseling course first
- Your debts can’t be from things like taxes or student loans
- You have to pass the court’s background check
Those are the basics, but every case is unique. There may be other factors that come into play for your specific situation.
How to Check Your Eligibility
If you want to get a good idea if you pre-qualify for Chapter 7, here are some tips:
- Calculate your current monthly income and compare to median
- Make sure you haven’t filed Chapter 7 recently
- Take a credit counseling course (required anyway)
- Review your debts and make sure they are dischargeable
- Check if you have enough assets to liquidate
Doing that homework upfront can give you a good sense if you may qualify. But for a definitive answer, you’ll want to consult a bankruptcy attorney.
An experienced lawyer can look at the specifics and let you know if Chapter 7 is your best option. They’ll also walk you through the process if you do qualify.
The Chapter 7 Filing Process
If you determine you are eligible and want to move forward, here is the basic process:
- File petition and forms with the bankruptcy court
- Complete credit counseling course
- Attend meeting with creditors and trustee
- Liquidate non-exempt assets to pay creditors
- Get discharge of remaining eligible debt
- Deal with any objections if creditors contest discharge
Having an attorney to guide you through makes a huge difference. They know all the forms, rules, and potential snags.
The Pros and Cons of Filing Chapter 7
Like any major decision, filing for Chapter 7 bankruptcy has both advantages and drawbacks. Let’s look at a quick pros/cons list:
- Get rid of most unsecured debt
- Stop wage garnishments and lawsuits
- Pause foreclosures and repossessions
- Get a fresh start financially
- Damages your credit for years
- May have to liquidate assets and property
- Doesn’t discharge some debts like student loans
- May be challenged by creditors
As you can see, bankruptcy comes with some big trade-offs. It’s not an easy way out, but it can give you a chance to reset your financial life if you qualify.
Alternatives to Chapter 7 Bankruptcy
If you don’t qualify for Chapter 7, or want to avoid bankruptcy altogether, there are alternatives to consider:
- Credit counseling to negotiate with creditors
- Debt consolidation loan to lower payments
- Debt settlement to negotiate lump payoffs
- Chapter 13 bankruptcy repayment plan
Each option has pros and cons too. A credit counselor can walk you through the different choices.
The Bottom Line
Checking your eligibility for Chapter 7 bankruptcy is the first step. From there, you can decide if it’s the right path or if you should consider other options.
While the process is complex, the basic Chapter 7 qualifications come down to passing the means test and meeting a few other requirements. If you do qualify, an attorney can guide you through the process.
Bankruptcy is a big decision with long term impacts. Evaluate all your options carefully and seek professional advice. But if you’re struggling with overwhelming debt, Chapter 7 may provide the fresh start you need.