Too Much Debt. Too Little Income: Can Bankruptcy Help?

For individuals with too much debt and little or no means to repay this debt any time soon, bankruptcy may be an option, specifically Chapter 7 bankruptcy. Chapter 7 bankruptcy affords a debtor the opportunity to discharge a significant number of debts, albeit at the cost of liquidating all non-exempt assets. For debtors with large amounts of debt and little or no income, and presumably few assets, Chapter 7 might prove beneficial. However, it is notable that not every individual that stands to benefit from Chapter 7 is eligible to file.

Eligibility Requirements of Chapter 7

With too much debt, the ability to file Chapter 7 is never guaranteed. However, when adding into the mix too little income, a debtor stands a fair chance at being deemed eligible to file Chapter 7. The process works as follows:

• An individual wishing to file Chapter 7 must undergo what is known as a “means test”, which is in place to prevent abuse of the bankruptcy system. In short, the means test takes into account current income of the past six (6) months and one’s current expenses. If the resulting figure, known as “disposable income” is too large, a debtor will not be allowed to file under Chapter 7.

• A big factor playing a role in the means test, aside from the actual income and expense figures, is the median income of the individual’s state. In any case where an individual debtor’s income is less than the median income of his or her state, the ability to file for Chapter 7 is granted.

• For persons with an income more than the applicable median income, other factors play a role in deciding eligibility. Again, the decision comes back to the amount of disposable income left over after calculating income and expenses, which are defined by the bankruptcy code, rather than the individual.

Considerations Concerning Chapter 7

Just because an individual is eligible to file under Chapter 7 does not mean that he or she will benefit from this process. There are alternatives to Chapter 7, including Chapter 13 and other bankruptcy alternatives, that are less invasive than Chapter 7. Debtors should recognize that filing for Chapter 7 will entail liquidation (sale) of most assets by the courts, and in addition, not all debts are dischargeable under Chapter 7. Certain non-dischargeable debts include tax debts, child support and alimony debts, and certain secured debts, if the debtor wishes to retain the property securing the debt.

Getting Legal Help with Debt Issues

For most individual debtors, the most relevant and helpful resource of information and possible strategies for relieving debt will be found in a debt and bankruptcy lawyer in their state. A lawyer can outline all of the possible options for debt relief, based on the highly individual and case-specific considerations relevant to your debt and income, as well as proceed with taking the decided upon action.