Are You Eligible for Chapter 7 Bankruptcy?

When the Bankruptcy Abuse Prevention and Consumer Protection Act was signed into law, requirements to determine eligibility for Chapter 7 bankruptcy were established. The first step is to determine if your income falls below your state's median income. If it does not, a means test determines your eligibility.

If you have calculated your monthly income, and it is above the median income for your state, you next apply the means test to see if you can file chapter 7 bankruptcy. (To find the median income tables by state and family size, go to the United States Trustee website at www.usdoj.gov/ust and click on 'Means Testing Information.')The means test tells whether you have enough income after subtracting expenses and debt payments to pay at least a part of your unsecured debt over a five year period and should use chapter 13 bankruptcy.

You begin the means test with your currently monthly income (your average monthly income for the past six months). From that you subtract:
monthly payments you have to make for secured and priority debts. Secured debts are those which give the creditor the right to take property if you don't pay (mortgage and car loan are major examples). Priority debts are the ones the bankruptcy law says get paid first. These typically are child support, alimony, taxes, and wages owed to employees.

Next subtract allowed expenses in amounts set by the Internal Revenue Service (IRS). Usually you cannot subtract what you actually spend on food, clothing, transportation etc. You have to use the limits set by the IRS which could be lower than the cost of living where you reside.
If your monthly disposable income after the subtractions is less than $100, you can file chapter 7 bankruptcy. If it's more than $166.66 you can't use chapter 7 unless you can prove that you have special circumstances that effectively bring your disposable income to below $166.66.

So what about amounts between $100 and $166.66? You have to figure out whether what you have left over after your subtractions is enough to pay more than a quarter (25%) of your unsecured, nonpriority debts (credit card bills, medical bills, etc.) over a five year period. If what you have left over is enough for that, you are not eligible for Chapter 7 bankruptcy unless you convince the court you have special circumstances that change the figures. If your disposable income is not enough, you can use chapter 7 bankruptcy.

If you received a discharge of your debts under chapter 7 bankruptcy within the last eight years or under chapter 13 within the last six years, you are not eligible for chapter 7 bankruptcy. You also are not eligible if you have a chapter 7 or 13 bankruptcy case dismissed within the past 180 days.

Finally, you are not eligible for chapter 7 bankruptcy if the court thinks you concealed assets or tried to cheat your creditors.

As you can see, determining if you are eligible for chapter 7 has become more complicated under the new bankruptcy law. You will need to know what expenses are allowed and make sure you have subtracted eligible priority debts. It's a good idea to consult a competent bankruptcy attorney.

Be sure to visit Information About Bankruptcy for more information and helpful resources.