Who Qualifies for Chapter 7 Bankruptcy Relief?
Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy," involves the sale of non-exempt assets to pay back creditors. The vast majority of our client's filing for Chapter 7 bankruptcy protection do not face the loss of any of their assets, because all of their assets clearly fall under the Bankruptcy Code's exemptions. See other article in this website in the Bankruptcy Overview section entitled "Bankruptcy Exemptions". Chapter 7 bankruptcy relief is designed primarily for individuals who are struggling with overwhelming debt and cannot realistically repay their creditors.
While Chapter 7 can provide a fresh financial start, not everyone can qualify for this type of debt relief. If you're dealing with overwhelming debt and are considering filing for Chapter 7 bankruptcy, it's important to understand the strict eligibility criteria and requirements.
Located in Hackensack, New Jersey, The Law Offices of Marc G. Alster is committed to helping individuals in northern and central New Jersey, as well as neighboring areas in New York, understand their debt relief options. Below, Mr. Alster explores who is eligible to qualify for Chapter 7 bankruptcy and what steps you can take to assess your situation.
Requirements to Qualify for Chapter 7 Bankruptcy
To file for Chapter 7 bankruptcy, you must meet certain eligibility requirements set by the United States Bankruptcy Code. These requirements were established to make sure Chapter 7 bankruptcy is only available to individuals who truly lack the financial ability to repay their debts through other means, such as a Chapter 13 repayment plan.
To qualify for Chapter 7 bankruptcy, you will need to meet the following requirements:
Pass a means test: The first requirement to qualify for Chapter 7 is passing the "means test". This test compares your average monthly income over the past six months with the median income in your state. If your income falls below the state median, you automatically pass the means test.
Repayment ability: Even if you pass the means test, another good faith, income limitations may disqualify you from filing for Chapter 7 bankruptcy relief. The Bankruptcy Court will evaluate your income, expenses, assets, and debts to determine if you have enough disposable income to repay at least a portion of your debts. If all the debtors' assets are exempt (can be protected by the Bankruptcy Code's exemptions) Individuals with little to no disposable income per month or less will qualify for Chapter 7 relief. Net disposable income is determined by comparing a debtor's net monthly income to the debtor's reasonable, monthly, projected, household expenses the debtor will need going forward after the filing for bankruptcy protection.
Residency requirement: To file for Chapter 7 bankruptcy in New Jersey or New York, or any state for that matter, you must have lived in the state where you are filing your petition for at least 91 of the 180 days leading up to the filing. This requirement is necessary in order to provide The Bankruptcy Court with legal jurisdiction over your case.
Credit counseling: Before filing for Chapter 7 bankruptcy, you must complete a credit counseling course from an approved agency within 180 days and the Certificate of Completion must be attached and filed with your petition. This requirement is meant to help educate individuals on alternative debt relief options and financial management skills.
No recent bankruptcies: If you have previously received a Chapter 7 Discharge Order discharging all of your dischargeable debts within the past eight years, you will not be eligible to receive another Chapter 7 Discharge Order in a subsequent Chapter 7 proceeding unless it is filed more than 8 years after your earlier case was filed.
Fraudulent activity: If you have engaged in fraudulent activity or attempted to conceal assets in your current or previous Chapter 7 bankruptcy case, your case may be either dismissed by the Bankruptcy Court or you may be ordered not to file a subsequent bankruptcy case.
If you or someone you know is struggling with overwhelming debt, consulting with an experienced bankruptcy attorney can help you accurately apply the means test and determine if you meet all the other qualifications needed for you to be eligible to receive a Chapter 7 Discharge Order.
How to determine it's best to file for Chapter 7 or 13 relief.
If you meet the eligibility requirements listed above, then you may qualify for Chapter 7 bankruptcy relief. However, it's important to assess your individual financial situation before deciding whether it's best for you to file for Chapter 7 bankruptcy protection. To evaluate your eligibility and determine if Chapter 7 is the best option for you, you should consider the following factors, among others, with your experienced bankruptcy attorney:
Types of debt: Chapter 7 bankruptcy primarily deals with unsecured debts such as credit card bills, medical bills, and personal loans. If most of your debts are secured (like a mortgage or car loan), then Chapter 7 may not be the most beneficial option. See other article in the Bankruptcy Specific section of this website entitled "An Overview of Chapter 13 Bankruptcy".
Exempt assets: In Chapter 7 bankruptcy, non-exempt assets are sold to repay creditors. Therefore, it's essential to confirm with an experienced bankruptcy attorney that all of your assets are exempt from liquidation. Once filed, you may not be able to voluntarily withdraw your Chapter 7 Petition if you own non-exempt assets which the Chapter 7 Trustee appointed by the Bankruptcy Court can sell. Exempt assets can include your primary residence, vehicle, and necessary personal belongings. See other article in the Bankruptcy Overview section of this website entitled "Bankruptcy Exemptions".
Income stability: Chapter 7 bankruptcy provides immediate relief from creditors, but it also means that you may have to forfeit certain "non-exempt assets". If you have a steady income and can afford to repay at least some of your debts over time through a Chapter 13 repayment plan, then this type of bankruptcy filing may be a better option to protect your assets. See other article in this website under the Bankruptcy Overview section entitled "An Overview of Chapter 13 Bankruptcy".
Ultimately, the decision to file for Chapter 7 bankruptcy should not be taken lightly. It's crucial to consult with an experienced bankruptcy attorney who can evaluate your situation and help you determine the best course of action.
Exceptions to the Means Test
While most filers are required to pass the means test to qualify for Chapter 7 bankruptcy, there are a few exceptions to this rule. If you fall into one of the following categories, you may be exempt from passing the means test to qualify for a Chapter 7 Discharge Order. It's important to consult with an attorney to confirm your exempt status before filing.
Disabled veterans: Disabled veterans who incurred their debt while on active duty or performing homeland defense activities may be exempt from having to pass the means test.
Military reservists and National Guard members: Military reservists and National Guard members who were called up for at least 90 days after September 11, 2001 may also be exempt from having to pass the means test.
Business debts: If the majority of your debts are business-related, you may be exempt from having to pass the means test. However, this exemption is only available to individuals whose business-related debts exceed 50% of their total debt.
Low-income filers with primarily consumer debts: If your income is less than 150% of the state median and your debt consists mostly of consumer debts (such as credit card or medical bills), you may be exempt from having to pass the means test. Either way, the Bankruptcy Code provides for generous deductions that can be subtracted from your gross income in order to qualify under the means Test even though your initial gross income is substantially higher than the median for your state.
If you do not meet with one of these exceptions, and still fail the means test, the Court may dismiss your case, but you will likely be able to convert to a Chapter 13 bankruptcy filing.
Seek Professional Guidance from a Trusted Bankruptcy Attorney
Determining eligibility for Chapter 7 bankruptcy can be complicated, so it’s important to seek the advice of a knowledgeable bankruptcy attorney. The Law Offices of Marc G. Alster offers expert bankruptcy guidance to New Jersey residents and New Yorkers in areas such as Bergen County, Passaic County, Essex County, Hudson County, Union County, and in Rockland County, Westchester County, Orange County, Putnam County, Dutchess County, Ulster County and Sullivan County, New York
If you think you qualify for Chapter 7 bankruptcy or want to learn more about other debt-relief options, contact The Law Office of Marc G. Alster today to schedule a consultation.