For individuals struggling with debt, bankruptcy may provide a path to financial stability. Among the various forms of bankruptcy, the Federal Bankruptcy Code provides “fresh start” relief through Chapter 7 Bankruptcy.
In his latest article, KingSpry’s Bankruptcy Law Attorney, Eric J. Filer, Esq., discusses who qualifies for Chapter 7 Bankruptcy relief and the various requirements that must be satisfied before filing.
Chapter 7 Bankruptcy
Chapter 7 Bankruptcy is known as “liquidation bankruptcy” or “fresh start bankruptcy” because the debtor’s assets will be liquidated and sold to pay off their creditors. The bankruptcy proceeding begins with the filing of a petition, along with various schedules detailing the debtor’s assets, debts, income, and expenditures. From there, the liquidation process starts. The bankruptcy court will appoint a trustee who is responsible for gathering and selling the debtor’s nonexempt assets, the proceeds of which are used to pay off creditors in accordance with the Bankruptcy Code.
Although filing for Chapter 7 Bankruptcy may result in the loss of property, the Bankruptcy Code allows the debtor to retain certain exempt property, such as their reasonably necessary clothing and household goods, retirement accounts, life insurance policies, and more. In a lot of cases, the exemption amount exceeds the value of the debtor’s property. In these cases, the debtor does not actually lose anything in the process.
For more information about Chapter 7 Bankruptcy, check out our previous article about overcoming the stigma of filing for Chapter 7 Bankruptcy.
Eligibility Requirements
While Chapter 7 Bankruptcy can provide the “fresh start” relief many debtors seek, not every debtor automatically qualifies. The Bankruptcy Code establishes several requirements that must be satisfied before a bankruptcy case may proceed.
1. Who Qualifies?
An individual, partnership, corporation, or other business entity may qualify for relief under Chapter 7. In most cases, an individual debtor will file for Chapter 7 Bankruptcy to discharge credit card debt, unpaid medical bills, or certain loans they are unable to pay.
2. Timing
To qualify for Chapter 7 Bankruptcy, the debtor must not have filed and received a discharge under Chapter 7 within the preceding eight years. Similarly, the debtor must not have filed and received a discharge under Chapter 13 within the preceding six years.
Additionally, the debtor must not have had a bankruptcy case dismissed within the preceding 180 days due to (1) their failure to appear before the court or comply with court orders or (2) their voluntary dismissal of the case.
3. Pre-Bankruptcy Credit Counseling
The Bankruptcy Code requires a debtor to receive credit counseling from an approved nonprofit budget and credit counseling agency within 180 days of filing. The primary purpose of this counseling is to evaluate the debtor’s financial situation to determine whether an alternative to bankruptcy is feasible.
4. Income Limits
The Bankruptcy Code also places income limits on those who qualify to file for Chapter 7 Bankruptcy. The first step is to determine whether a debtor’s income is greater than or less than their State’s median income. If a debtor’s income is less than their State’s median income, they can file for Chapter 7 Bankruptcy. If a debtor’s income is greater than their State’s median income, the court will apply the “Means Test” to determine whether granting Chapter 7 Bankruptcy would “abuse” the Bankruptcy Code.
The bankruptcy court will use the Means Test to determine whether a debtor is entitled to file for Chapter 7 Bankruptcy or if they must convert their case to Chapter 11 or 13 Bankruptcy. Using the Means Test, the court will compare the debtor’s monthly income and expenses to determine the debtor’s disposable income. The higher a debtor’s disposable income, the less likely they will be able to file for Chapter 7. This is because the debtor appears to have enough income to at least partially repay their creditors.
Achieving a Fresh Start
If filing for Chapter 7 Bankruptcy is the best choice for you, the next step is to consult with experienced legal counsel who can evaluate your eligibility, explain your options, and guide you throughout the bankruptcy process.
At KingSpry, our experienced Bankruptcy Law Practice Group helps individuals and businesses find the best path toward financial relief and a fresh start. If you have questions, contact our bankruptcy team for personalized guidance you can count on.
Debt Reset is a publication of KingSpry’s Bankruptcy Law Practice Group. This article is meant to be informational and does not constitute legal advice.
