Chapter 7 Bankruptcy, also known as liquidation bankruptcy, is the most common bankruptcy case—63 percent of over 800,000 bankruptcy cases in 2016 were Chapter 7. It discharges most of the unsecured debts that include medical bills, personal loans, and credit card debts.
Being the quickest, most common, and the simplest type of bankruptcy to file doesn’t mean that filing Chapter 7 is that easy. There are very important bankruptcy requirements you need to understand in order to receive a discharge and protect your assets.
The Bankruptcy Means Test
Before filing for bankruptcy, you must have what’s known as a means test analysis performed, which determines whether your income is low enough to warrant a Chapter 7 bankruptcy filing. This formula is important in determining the type of bankruptcy you are eligible for, but you must also know the exceptions to means test when filing for bankruptcy.
If you undergo a means test and it’s determined that your income is too high, you may be required to file a Chapter 13 bankruptcy. This is considered a reorganization bankruptcy where you will need to pay a portion of your debts. A chapter 13 bankruptcy offers various alternatives to restructuring your debt over a 3, 4, or 5 year period.
If you have high expenses such as car loans, mortgage, daily expenditures, and taxes, you may still qualify to file for Chapter 7 bankruptcy even with a high income. One of the most important considerations is determining the amount of your monthly disposable income.
Passing the Means Test
In most cases, you must pass the “means test” for you to qualify for Chapter 7 bankruptcy. However, filing for bankruptcy doesn’t have to be a nightmare because there are just simple things to be considered before you can qualify. They include:
1. Little or No Disposable Income
The means test will compare your average monthly income with the median income of a household similar to yours. This is done for six months prior to filing bankruptcy. If your income is below the average income per household, you will qualify to file a Chapter 7 bankruptcy.
The average income per household varies from state to state. Hence, the means test must put your state in mind when doing the calculations.
2. Expenses against Income
It is not the end of the game for you if your income exceeds the average monthly income per household. You can still qualify to file for a Chapter 7 bankruptcy. However, you will not qualify automatically as you must fulfill the next bankruptcy requirements.
In this case, you will need to go to the next stage of the means test. This is the balancing stage that weighs your total income versus the expenses you have. If all your expenses versus your income amount to little or no disposable income, you will be allowed to file a Chapter 7 bankruptcy.
Every city, state, county, or metropolitan region has its allowed amounts of expense categories. Some of these include all the necessities, transportation, and housing. Any expenses on luxury will not be used in the means test.
If your total expenses are still less than your average income, you may not qualify to file for Chapter 7 bankruptcy. This presumes you still have some disposable income, which you can use to pay your debts. However, this presumption may be rebutted in certain circumstances to allow you to still qualify for chapter 7 bankruptcy.
Do I qualify for Chapter 7 after passing the test? Not yet. There are other things that you must consider before qualifying for this bankruptcy.
If you had filed for Chapter 7 bankruptcy before and received a debt discharge, you need to wait eight years from your prior case filing before filing another bankruptcy.
However, if you filed before and did not finish the case or did not receive a discharge, you’re allowed to file for a Chapter 7 bankruptcy anytime. Of course, you must still pass the means test for the second filing.
If you filed a Chapter 7 bankruptcy, failed the means test but received a discharge under Chapter 13 bankruptcy, you need to wait for at least six years from your prior case filing before filing for a Chapter 7.
If you filed for Chapter 13 bankruptcy but did not complete the case or failed to get a discharge, you can file for Chapter 7 bankruptcy anytime.
Prebankruptcy Credit Counseling
Filing for bankruptcy is a tiring and stressful process that can put you through tremendous pressure and stress if you’re not careful. This is why it is a requirement that you go through a pre-bankruptcy credit counseling course at least six months before the bankruptcy filing.
The course is provided by an approved agency, which will give you a certificate after completion of the course and the certificate is only valid for 6 months. You must produce this pre-bankruptcy credit counseling certificate in court when filing for bankruptcy.
If You Qualify for Chapter 7 Bankruptcy
Things don’t end at Chapter 7 qualifications. Filing for any bankruptcy that is fit for you is a long process that involves a lot of analysis and review of your paperwork. Completing everything and obtaining a final discharge can take you up to four months.
The first thing you need to do is file a petition with your designated bankruptcy court. You will need to file various bankruptcy pleadings, which details your income, expenses, assets, liabilities, and overall financial standing.
Secondly, you must be prepared to spend some fees, including paying an attorney, credit counseling, and payment for petition filing. You must also be prepared for potential loss of privacy and financial control.
If You Don’t Qualify For Chapter 7 Bankruptcy
All hope is not lost if you don’t qualify for Chapter 7 bankruptcy. You can still file Chapter 13 bankruptcy. This bankruptcy will require you to make monthly payments for a period of three to five years. This payment will undergo a strict budget, which is monitored by the court.
Chapter 13 bankruptcy is still not a bad idea because it will still help you handle some debts that will not go away in Chapter 7, and Chapter 13 has the ability to restructure vehicle payments, mortgages and property taxes to stop repossessions and foreclosures.
Let’s Help You Fulfill Bankruptcy Requirements
Filing for a Chapter 7 bankruptcy will help you get relief on some debts. It is very important to understand the Chapter 7 bankruptcy requirements as you may be at risk of losing your hard-earned assets, such as homes, vehicles, and savings if those assets are not properly exempted. However, you must also understand that rebuilding yourself and getting back on track can be a rigorous process. Bankruptcy will stay on your credit report for up to ten years.
Therefore, it requires a lot of consideration before you go through it, even when you meet all bankruptcy requirements. If you want help going through a bankruptcy process, contact us, and we will connect you to a bankruptcy attorney near you.