Qualifications to File Chapter 7 Bankruptcy
By far, most bankruptcies are filed under Chapter 7. This type of bankruptcy allows you to have many kinds of debts permanently forgiven if they can't be paid from the value of your assets. The popularity of this provision led Congress to limit access to Chapter 7 only to those with low income or large debt relative to their income.
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History
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In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act or BAPCA. The "bankruptcy abuse" to which the title refers was primarily in regard to Chapter 7 filings, which had a fairly minimal level of qualification up to that point. To prevent excessive use of Chapter 7, Congress created several new qualifications, including a credit-counseling requirement. The most notorious qualification, though, is the Chapter 7 means test.
Credit Counseling
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After BAPCA, as part of any bankruptcy filing, including Chapter 7, you must show that you received credit counseling from an approved agency within the 180 days before submitting your petition. The credit counselor will solicit most of the same information necessary for a bankruptcy petition and will help you determine whether you qualify for Chapter 7. The counselor provides a certificate of completion, which is filed with your petition. If, for some demonstrable reason, you are unable to attend credit counseling before filing, the court will accept your promise to attend counseling shortly afterward.
Means Test
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Before BAPCA, debtors of any income could file for Chapter 7. Today, qualifying debtors are limited by a means test that compares the debtor's income to the median family income of the state. If your income is less than the median income of a household of your size in your state, then you pass the means test and automatically qualify for Chapter 7 bankruptcy. The official median income data provided by the U.S. Census Bureau is used for these determinations.
Income
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To calculate income for the means test, you do not simply provide your annual income. Instead, for the means test, the court requires you to average your income for the three months preceding your petition.
Alternative Means Test
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If you don't qualify for Chapter 7 under the means test, there is one other way to qualify. This occurs if your income is insufficient to pay your debts over a five-year period. Under Chapter 13, you can deduct certain necessary expenses from your average monthly income. What's left over is your discretionary income, which, when multiplied by 60, is the amount you'd be expected to pay toward your debts. If this amount is less than 25 percent of the total debts that can be discharged in bankruptcy, you fail to qualify for Chapter 13 and are thus able to file under Chapter 7.
Time Frame
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There is also a time element to Chapter 7 bankruptcy. You do not qualify to file if you've received a Chapter 7 discharge less than eight years before filing again, or a Chapter 13 discharge in the previous six years. In some situations, if your case is dismissed without a discharge of debt, you may be barred from refiling for a period of several weeks.
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