Determining your eligibility for Chapter 7 bankruptcy hinges on meeting specific criteria. One essential requirement is passing the “means test,” which ensures your income is low enough to qualify for debt discharge. If you’ve previously filed for bankruptcy, you must observe a waiting period before filing again. This article will delve into the qualifications for Chapter 7 bankruptcy, the factors that could disqualify you, and more.
Can You Qualify for a Chapter 7 Discharge?
Chapter 7 bankruptcy can be a powerful tool for individuals and businesses looking to liquidate assets to satisfy creditors. However, for most people, the primary concern is whether they qualify for a Chapter 7 discharge. This court order erases debts such as credit card balances, medical bills, and personal loans.
Businesses and Discharge:
Generally, only sole proprietors can obtain a discharge under Chapter 7. Other business entities, like corporations or LLCs, can file to liquidate assets but do not receive debt discharge.
Individuals and Discharge:
Individuals must meet specific criteria to qualify for a Chapter 7 discharge. If they don’t, they might still be able to liquidate assets for the benefit of creditors.
What Could Prevent You from Filing for Chapter 7 and Getting a Discharge?
Several factors could disqualify individuals from receiving a Chapter 7 discharge. Below are the primary obstacles and ways to navigate them.
High-Income Individuals:
If your income exceeds the Chapter 7 limits, you may not qualify for a discharge because you can potentially repay your debts. Instead, you may need to opt for a Chapter 13 plan, which involves a three- to five-year repayment schedule.
Income Evaluation for Chapter 7
The “means test” determines if you have enough income to repay creditors under Chapter 13 instead of qualifying for Chapter 7.
State Median Income Comparison:
First, your income is compared to the median income for your state. Calculate your average monthly income over the six months before filing, then annualize this amount.
If your income is at or below the state median, you’re likely eligible for Chapter 7. If it’s above, you must pass a secondary evaluation of your disposable income.
Disposable Income Assessment:
Even after passing the means test, the bankruptcy trustee will review your current financial situation to ensure you can’t afford to repay debts. This involves examining your income and expenses.
For example, suppose your financial situation has improved significantly just before filing, as in the case of Tina, who received a higher-paying job shortly before filing. In that case, the trustee may request to convert her case to Chapter 13.
Other Criteria that Might Disqualify You
Previous Bankruptcy Filing:
You cannot receive a Chapter 7 discharge if you’ve had one in the past eight years. Similarly, a six-year waiting period applies if you switch from Chapter 7 to Chapter 13 or vice versa.
Even if a discharge isn’t possible, you can still file for Chapter 7 or 13 to leverage other bankruptcy protections like halting wage garnishments or property seizures.
Recent Case Dismissal:
Suppose a previous bankruptcy case was dismissed within the last 180 days due to violations of court orders, fraudulent filings, or voluntary withdrawal after a creditor’s motion for relief. In that case, you cannot file for Chapter 7 during this period.
Fraudulent Activity:
Engaging in dishonest activities, such as concealing assets or incurring debts without intent to repay, can lead to case dismissal and potential fraud charges.
Business Bankruptcy Considerations:
Corporations and LLCs can’t obtain a discharge under Chapter 7. The bankruptcy trustee will liquidate the business’s assets to pay off creditors. For business owners who guaranteed business debts, personal bankruptcy might be a strategic choice to manage these obligations.
Example Scenarios:
Tina filed Chapter 7 a year ago, clearing most debts but still facing significant tax arrearages and new credit card debt. Filing for Chapter 13 now allows her to manage these debts through a structured repayment plan without immediate collection threats.
Bill’s Car Wash faced financial failure, leaving Bill, who personally guaranteed the business debt, in a tough spot. Depending on the asset values and remaining liabilities, he must decide whether to liquidate the business through Chapter 7, file personally to address both business and personal debts or use a combination of both strategies.
The information provided on this page is for informational purposes only and does not constitute legal advice or create an attorney-client relationship. Please contact a licensed bankruptcy attorney to determine your bankruptcy eligibility options.