Do I Qualify to File a Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a procedure to ask the federal government for protection from creditors and relief from debt obligations. While federal bankruptcy statutes exist to protect the "honest but unfortunate" debtor, not all debtors are permitted to file Chapter 7 bankruptcy. In order to qualify, you must pass a series of financial tests that evaluate your financial situation and your ability to repay your debts.
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Median Income
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Qualifying for Chapter 7 bankruptcy can depend to a large degree on the state in which you live. If the total income of your entire household falls below the median income for your state, then you have passed the first qualification test for filing a Chapter 7 bankruptcy. You must include your spouse's income in this calculation even if he is not filing a joint bankruptcy petition with you.
Means Test
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If you do not fall below the median income for your state, you must take the means test to qualify for a Chapter 7. The means test requirement is designed to limit Chapter 7 filers to those who truly cannot pay pack their debts. To complete the means test, you will have to calculate your "current monthly income," which is the average of all income you have received over the past six months. From this figure you are allowed to deduct certain average expenses as defined by the Internal Revenue Service. If the resulting figure is less than the median for your state, you can proceed with your Chapter 7 filing.
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Disposable Monthly Income
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Even if you are over your state's median income based on the means test, you still may be eligible to file a Chapter 7. Disposable monthly income (DMI) is the amount of money you have left over every month after paying all of your allowable expenses as defined by the IRS. If your DMI times 60 exceeds $11,725 as of 2010, you cannot file Chapter 7. If your DMI times 60 is between $7,025 and $11,725 you can file Chapter 7 only if this amount equals 25 percent or more of your unsecured debt.
Chapter 7 Vs. Chapter 13 Bankruptcy
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In a Chapter 7 bankruptcy you must forfeit assets above a certain level to your creditors in exchange for a discharge of your debts. If you do not qualify for a Chapter 7 bankruptcy or have substantial assets you wish to protect, you can file a Chapter 13 bankruptcy, which is essentially a three- to five-year payment plan in which you are allowed to keep your assets.
Abuse of System
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The U. S. Trustee's Office reviews all bankruptcy filings to prevent abuse of the bankruptcy system. Even if you pass the means test, the U.S. Trustee may file a motion to dismiss or convert your Chapter 7 filing to a Chapter 13 filing if the "totality of circumstances" suggests you are taking advantage of the bankruptcy laws. Even if your DMI from the means test indicates you "pass," if your Schedule I income is substantially greater than your Schedule J expenses in your bankruptcy petition, the U.S. Trustee may still get involved.
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