Are You Eligible to File Chapter 7 Bankruptcy?

If you are severely in debt and believe you are unable to repay your creditors, you may be thinking about filing for chapter 7 bankruptcy. Consulting with a qualified bankruptcy attorney can help you determine if bankruptcy is the best course of action for your particular situation, and if so, how to file chapter 7 bankruptcy.

To begin the bankruptcy process you must first determine which type of bankruptcy filing is the best fit for your situation. If you are a filing as an individual and not a corporation, you will most likely file under Chapter 7 or Chapter 13.

Determining the Type of Bankruptcy You Should File For

There are several types of filings for bankruptcy to help protect citizens who fall into different categories of debt, but the most common is chapter 7 vs chapter 13. To determine which bankruptcy proceeding will be the most beneficial to you as an individual, it is important to learn the basic components of Chapter 7 bankruptcy.

Chapter 7 Bankruptcy

Also known as “Liquidation”, Chapter 7 is the most common type of bankruptcy filing and involves a court appointed trustee who collects the debtor’s assets then sells them, distributing the proceeds to the various creditors in order to eliminate the debt.

The assets that can be collected for creditor repayment fall into the non-exempt property of the debtor.

Assets that cannot be collected and sold by the trustee include:

• Reasonable and necessary household goods
• Public benefits
• Pensions
• Damages awarded for personal injury
• Other necessities

After Chapter 7 filings and their assets have been liquidated, any remaining debts are discharged (forgiven) with certain exemptions including child support and student loans among others. This bankruptcy chapter 7 discharge applies even if the amount of debt owed is considerably more than the worth of the seized and liquidated assets.

Eligibility for Chapter 7 Bankruptcy

To determine your eligibility for Chapter 7 bankruptcy, you first need to see if your income level qualifies. You can determine this by averaging your income for the past six months and then comparing that number to the median income for a family of your size in the state where you live.

To be eligible for filing a Chapter 7, your average income needs to be less than or equal to the median income of your state. You can obtain your state’s median income data by visiting the Chapter 7 Means Test Information page of the U.S. Trustee Program website.

If your median income is more than the amount set forth by your state, you may still qualify for Chapter 7 if you can pass the “Means-Test”. The Means-Test calculates both your overall income and disposable income.

You can determine your disposable income by using the median income you derived through the Means Testing Information page, then subtracting the following information:

• Clothing, transportation, food and other expenses in the amounts set by the IRS.
• Monthly payments you are required to make on secured and priority debts. These can include mortgages, car loans, child support, alimony, and tax debts among others.

If after you complete these calculations you determine your income is less than $100 per month, you are eligible to file for Chapter 7. A disposable income higher than $166.66 per month means that you cannot file Chapter 7, but you may be eligible for bankruptcy and Chapter 13, unless you can present a valid argument for an exception.

If by chance your disposable income falls between $100 and $166.66, you should speak with a bankruptcy attorney or financial professional to determine if you have enough income to pay over 25% of your unsecured, non-priority debts like student loans and credit cards. If you cannot afford that amount, you will most likely still be eligible to file for Chapter 7.

As with all bankruptcy procedures, a Chapter 7 bankruptcy filing will appear on your credit report for up to 10 years. The long term consequences of filing for Chapter 7 bankruptcy should be considered and discussed with a bankruptcy professional to determine if this is the best choice for you, or if there are other debt repayment options that will help you repair bad credit with less damage to your credit score.