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Who qualifies for Chapter 7 bankruptcy?

We mentioned last time that not everybody who decides to move forward with the bankruptcy process will qualify for a Chapter 7 filing. This is because there are specific financial requirements for Chapter 7 eligibility. The same is not true of Chapter 13 bankruptcy, which is available to any debtor whose combined unsecured and secured debts are below a certain specified amount.    

Chapter 7 does not involve any limitations as far as the amount of debt, whether secured or unsecured, but it does involve income requirements which are screened by the means test. The means test is applied to a debtor if his or her current monthly income is greater than the median state income. The purpose of the means test is to determine whether a debtor’s Chapter 7 filing creates a presumption of abuse, meaning that allowing the debtor to move forward in the process would constitute an abuse of the system. 

At present, abuse is presumed if the debtor’s total current monthly income over five years, minus certain deductions allowed by statute, is greater than $12,475 or 25 percent of the debtor’s unsecured nonpriority debt, provided the amount is at or above $7,025. The presumption of abuse is only a presumption, and may be refuted by showing that there are special circumstances justifying adjustments of the debtor’s current monthly income. Debtors who do not qualify on these terms may have their case converted to a Chapter 13 filing, or dismissed.

There are other eligibility requirements for Chapter 7 bankruptcy, but the means test is the main hurdle for most debtors. In a future post, we’ll take a closer look at the specifics of the means test.

Sources:

United States Courts, “Chapter 7 Bankruptcy Basics,” Accessed Jan. 12, 2016.

United States Courts, “Chapter 13 Bankruptcy Basics,” Accessed Jan. 12, 2016. 

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