After someone has already decided that filing for bankruptcy is in their best interest, the next question will be what bankruptcy chapter is going to be suitable for them. After consulting with a bankruptcy attorney, who can answer questions and address concerns, it may be decided that one of the seven bankruptcy chapters is going to get that person off their feet the most effectively. One of the most commonly utilized bankruptcy chapters is Chapter 7.
What is Chapter 7 Bankruptcy?
Under Chapter 7 bankruptcy, the debtor must give over his nonexempt property to a trustee, who will then convert it into cash to pay creditors. The majority of Chapter 7 bankruptcy cases are “no asset”, which means the debtor’s owned property is exempt based on federal or state law. For liquidating their property, the debtor receives discharges of debts.
Who Can File for Chapter 7 Bankruptcy?
Any person who lives, does business, or owns property within the United States is eligible to file for Chapter 7 bankruptcy. The only exception to this rule is someone who has purposefully dismissed a bankruptcy case in the past 180 days. To qualify for this chapter, the individual has to be approved under the “means test”. Here is a list of reasons why someone may not be eligible for Chapter 7 bankruptcy:
- They have been granted a discharge under this chapter within 8 years.
- They have been granted a discharge under Chapter 13 within 6 years.
- They have acted fraudulently in regards to their debts and creditors.
- They have failed to explain a deficiency in their assets.
- They have refused to answer questions by the court and/or their creditors during the mandatory meeting.
- They have failed to complete a mandatory course on financial management.
What is the Means Test?
To determine whether someone is eligible to file for Chapter 7 bankruptcy, they will go through the “means test”. Under this test, the individual’s monthly income is multiplied by twelve and where they stand on the median annual income is identified. Essentially, if the debtor earns more than the median income level, then they may be approved for Chapter 7 bankruptcy, and their case will be dismissed. The debtor may have the option of converting their application to Chapter 13 instead, where they pay back a portion or all of their debts over the course of a 3-5 year repayment plan.
What Debts are Not Dischargeable Under Chapter 7?
All types and amounts of debts are dischargeable under Chapter 7 bankruptcy, except for those that are forbidden by law. The most common kinds of debts that are not dischargeable include the following:
- Debts not listed on the bankruptcy forms
- Debts related to domestic support
- Debts for purposeful injury to another person and/or property
- Debts for personal injury or death caused by the debtor’s use of their car
- Debts for student loans (however, unless the court determines that not discharging the debt would cause undue hardship)