HOW DOES A PERSON QUALIFY TO FILE CHAPTER 7 BANKRUPTCY?

Chapter 7 bankruptcy is also known as “liquidation bankruptcy” because the trustee in the case liquidates all of the filer’s assets that are not protected by exemptions to pay back creditors. Then the court absolves the filer of personal liability for all remaining debts. In 2005, Congress amended the law in an effort to ensure that only those who truly need the powerful protections of Chapter 7 bankruptcy can file. As a result, people now need to pass a means test before filing for Chapter 7 bankruptcy, which means that their income and “means” must be below a certain amount.

Median Income

The first step in determining whether a person qualifies to file Chapter 7 bankruptcy is to check whether the filer’s income is higher or lower than the median income of a family the same size in the filer’s state. If a person’s income is lower than the state’s median income, he or she automatically qualifies for Chapter 7 bankruptcy.

Income and Debts

If a person’s income is greater than the state’s median income, he or she may still qualify for Chapter 7 bankruptcy. The next step is to subtract the allowable expenses as defined by the I.R.S. from a person’s gross income to determine a person’s “disposable income.”

If a person’s projected disposable income is less than $6,000 over the state’s median income over the next five years, then he or she qualifies to file Chapter 7. If a person’s projected disposable income is between $6,000 and $10,000 over the state’s median income over the next five years, a person may still qualify for Chapter 7 by comparing his or her disposable income to the amount of unsecured debt he or she has to see if any significant repayments to creditors are possible. If a person has a disposable income of less than 25 percent of his or her unsecured debt, then he or she qualifies for Chapter 7 bankruptcy.

Talk to a Lawyer

Determining whether to file bankruptcy and which type of bankruptcy to file can be confusing. If you are struggling financially and considering the protections that bankruptcy can offer, consult a seasoned bankruptcy attorney who can discuss your situation with you and advise you of your options.

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Broege, Neumann, Fischer & Shaver, LLC
25 Abe Voorhees Drive
Manasquan, NJ 08736

Phone: 732-722-5763
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Manasquan Law Office