5 Key Requirements To Qualify For Chapter 7 Bankruptcy
Chapter 7 bankruptcy offers a fresh start by discharging most unsecured debts, but not everyone qualifies for this form of debt relief. Congress established eligibility requirements to prevent abuse of the bankruptcy system and direct higher-income filers toward Chapter 13 repayment plans. Understanding whether you meet these requirements helps you determine if Chapter 7 is a viable option for your financial situation.
Our friends at Pioletti Pioletti & Nichols note that Chapter 7 bankruptcies constitute the majority of consumer bankruptcy filings, providing relief to hundreds of thousands of Americans each year who cannot pay their debts. When you’re considering bankruptcy relief, a Chapter 7 bankruptcy lawyer can assess your eligibility, help you pass the means test, and guide you through the filing process to maximize your debt discharge.
The Means Test Determines Basic Eligibility
The means test compares your income to the median income in your state for households of your size. If your income falls below the state median, you automatically pass and qualify for Chapter 7. If your income exceeds the median, you must complete additional calculations to determine eligibility.
These calculations account for allowed deductions including mortgage payments, car payments, taxes, insurance, childcare, and health care costs. Even with above-median income, you may still qualify if your allowed expenses reduce your disposable income below the threshold amount.
The means test uses a six-month lookback period for income calculation. If you recently lost a job or experienced income reduction, your current financial situation may be much worse than what the means test reflects. We can help time your filing strategically to improve your means test results.
You Must Complete Credit Counseling
Federal law requires you to complete credit counseling from an approved agency within 180 days before filing bankruptcy. This requirement cannot be waived except in very limited emergency situations. The counseling session typically takes 60 to 90 minutes and can be completed online, by phone, or in person.
The counseling agency reviews your financial situation and discusses alternatives to bankruptcy including debt management plans. You receive a certificate of completion that must be filed with your bankruptcy petition. Filing without this certificate results in case dismissal.
This requirement serves as a final checkpoint before bankruptcy, giving you one last opportunity to consider whether non-bankruptcy options might resolve your financial problems. Most people who reach this stage proceed with bankruptcy filing because alternatives aren’t viable given their circumstances.
Previous Bankruptcy Filings Create Waiting Periods
You cannot file Chapter 7 if you received a discharge in a previous Chapter 7 case filed within the past eight years. The waiting period is six years if your previous discharge was in a Chapter 13 case, with exceptions if you paid most of your debts in that prior case.
These waiting periods prevent serial bankruptcy filings and force debtors to live with the consequences of their previous bankruptcy discharge for a reasonable period before seeking relief again. The time period is calculated from filing date to filing date, not from discharge date.
If you’re within a waiting period, Chapter 13 may still be available even if Chapter 7 is not. We can evaluate which chapter serves your needs best based on your filing history.
Debt Types Affect Your Strategic Position
While most unsecured debts are dischargeable in Chapter 7, certain obligations survive bankruptcy:
- Recent tax debts (generally less than three years old)
- Student loans (except in cases of undue hardship)
- Child support and alimony
- Debts from fraud or willful injury
- Certain court judgments and fines
If most of your debt consists of non-dischargeable obligations, Chapter 7 provides limited benefit. You’ll still owe these debts after bankruptcy while having used your one discharge for minimal relief.
We analyze your debt composition to determine whether Chapter 7 will meaningfully improve your financial situation or whether alternatives like payment plans or Chapter 13 make more sense.
Asset Protection Through Exemptions
Chapter 7 is a liquidation bankruptcy where a trustee can sell your non-exempt assets to pay creditors. Each state provides exemptions that protect certain property from liquidation. Common exemptions cover a homestead (residence), vehicle, personal property, retirement accounts, and tools of trade.
You must qualify to keep your property under available exemptions. If you have significant equity in assets that exceed exemption amounts, the trustee will sell those assets. This makes Chapter 7 inappropriate for people with substantial non-exempt equity who want to keep their property.
Most Chapter 7 filers have few assets beyond exempt property, making their cases “no-asset” proceedings where the trustee doesn’t sell anything. We evaluate your assets against available exemptions to predict whether you’ll lose property in Chapter 7.
Special Circumstances Requiring Additional Analysis
Certain situations complicate Chapter 7 eligibility or strategy. Business owners, people with significant recent income variations, those facing foreclosure or repossession, and individuals with unusual debts all need tailored analysis beyond basic eligibility requirements.
Recent large purchases or cash advances can be presumed fraudulent and excepted from discharge. Transfers of property to family members before filing may be reversed as fraudulent conveyances. Tax issues, lawsuits in progress, and co-signed debts all require special handling in Chapter 7.
Determining Your Best Path Forward
Chapter 7 bankruptcy provides powerful debt relief for those who qualify, but eligibility involves more than just wanting to discharge debts. Income, prior filings, debt types, and assets all affect whether Chapter 7 is right for your situation. If you’re struggling with overwhelming debt, contact us to assess your Chapter 7 eligibility and discuss all options available for resolving your financial difficulties.