When debt gets too much of a burden for an individual, they have the option of filing for Chapter 7 bankruptcy. Chapter 7 allows them to erase unsecured debts by selling non-exempt assets. However, it isn’t as simple as just filing a petition to start the case because debtors have to meet qualifications.
The means test
After a person files the petition, the court will apply a means test using a one-step or two-step process. The court will compare the debtor’s income to the median average income in the state for a household their size. If the debtor falls below that, they qualify for Chapter 7.
If the debtor’s income surpasses the median income, the court may total all income from the past six months and deduct expenses from this amount to determine disposable income. This test doesn’t mean that the debtor needs zero income, but it prevents high earners from abusing the system.
Non-consumer and active-duty debts
A debtor commonly doesn’t have to pass the means test if they have non-consumer debt totaling more than 50% of their income. A non-consumer debt refers to unsecured debts taken for business purposes, such as personal loans and credit card debt for equipment or vehicles.
Medical expenses may be considered non-consumer debt because no one voluntarily goes into medical debt. However, the debtor will need to show proof of why they needed to take the debt. Veterans who accumulated debt on active duty commonly get exempt from the means test.
No recent filings
While multiple bankruptcy filings are allowed, most states prohibit more than one filing in a certain time frame to prevent abuse of the system. The filing period refers to the date of filing, not discharge.
Debtors who have filed Chapter 7 less than eight years from the current bankruptcy won’t qualify. This doesn’t include cases that got dismissed or didn’t receive a discharge.
Chapter 7 bankruptcy is commonly a straightforward process, but it involves paying careful attention to avoid dismissals. A lawyer may help the debtor avoid getting their case dismissed and help them with all the paperwork.