Are You Eligible to File for a Chapter 7 Bankruptcy?

Before 2005, it was fairly easy for debtors to file a Chapter 7 bankruptcy and essentially eliminate all of their current debt. However, in 2005, an increasing number of bankruptcy filings prompted Congress to pass the Bankruptcy Abuse Prevention and Consumer Protection Act. This act made it more difficult for consumers to file a Chapter 7, requiring them to meet more strict (and consistent) eligibility requirements. Advocates of the act claimed that it would reduce losses to creditors, who would then pass on the savings to borrowers through lower interest rates.

In order to determine eligibility, debtors must now pass the bankruptcy means test. However, exceptions to this rule can be granted to disabled veterans (that incurred debt during active duty) or if the debt was incurred mostly from operating a business. If you don’t qualify for either of these exceptions, the first step is to compare your average monthly income (over the last 6 months) to the median income for your State and family size. If your average income is less than the median income, you are likely eligible to file a Chapter 7 bankruptcy. Note that even if you pass the means test, the bankruptcy trustee can still ask the court to require repayment through a Chapter 13 repayment plan. This decision is often made if the trustee feels that the debtor has enough disposable income to repay all or part of their debt.

If you make more than your State’s median income, you may still qualify to file a Chapter 7 by passing the second phase of the means test. The second phase of the test is much more complex and can be potentially confusing. This portion of the test requires a more extensive examination of a debtor’s expenses and can be calculated by your attorney. Even if you don’t pass either phase of the means test, you can still file for a Chapter 13 repayment plan. While this plan will require that you pay back all or part of your debt, you may still be able to drastically reduce your current monthly debt payments and stop harassing phone calls from your creditors.

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