Can I File Chapter 7 Bankruptcy?
So you wonder, “Can I file chapter 7 bankruptcy?” Contact us to find out or read on:
I. Who Can File Chapter 7 Bankruptcy In Terms of Status and Prior Bankruptcy Filings?
- Persons or businesses can file Chapter 7 Bankruptcy.
- If unwed, you must file chapter 7 bankruptcy alone– no paramours, beaus or simply significant others. If you’re hitched, you can file chapter 7 bankruptcy with- or without-your-spouse.
- If you had a prior chapter 7 bankruptcy discharge, you can’t file another chapter 7 bankruptcy for eight (8) years (from the filing date of the previous chapter 7).
- If you had a prior Chapter 13 Bankruptcy discharge, you can’t file chapter 7 bankruptcy till six (6) years after that past chapter 13. The six years start ticking from the prior bankruptcy case filing date. An exception applies for high-level of debt repayment in the prior chapter 13 bankruptcy.
- If you satisfy the above, then the next question is
In deciding whether you’re a candidate for chapter 7 bankruptcy, your San Diego Bankruptcy Attorney will inquire into your income as well as the effect of expenses that exhaust your earnings.
Chapter 7 bankruptcy is a gift given IF you show you can’t repay your debt. Thus, it makes sense that you can’t have “too much” money, yet still qualify for chapter 7 bankruptcy. And what’s considered “too much” moola for a chapter 7 bankruptcy filer?
A. Median Income in Bankruptcy
A starting point for chapter 7 bankruptcy eligibility is whether your gross income is below- or above-the-state’s gross “median income.” The median income is the halfway point: half of California gets less, half of Cali takes in more. If your income’s below the median, you’re quicker to qualify for chapter 7 bankruptcy. It’s a bankruptcy presumption that below-median-income persons can’t afford to repay debt.
These are the current gross-median-income numbers for use in California bankruptcy cases:
- $50,579 for a household of one;
- $66,537 for a household of two;
- $70,816 for a household of three;
- $81,837 for a household of four; and
- For each individual in excess of four, add $8,400 (pets don’t count).
The above sums are good as of May 2016; they update often. Check the U.S. Trustee website for fresh figures or, you know, remind me to update your bankruptcy lawyer website.
In sum, if you earn BELOW the above median-income  you very-likely qualify for chapter 7 bankruptcy. Your bankruptcy lawyer says “very-likely” in lieu of “indubitably” ’cause even if you’re below median, your budget must be balanced: income must be offset by expenses. And you can’t claim inflated income-offsetting expenses. Note: Social Security income is removed from this analysis. You’re allowed a surplus in income to the extent it stems from Social Security.
B. The Means Test in Bankruptcy
Now, if you earn/receive ABOVE the median income, you likely STILL qualify for chapter 7 bankruptcy. (Your bankruptcy lawyer told you not to worry… and if he didn’t, then he’s telling you now.) If you’re above median, your San Diego bankruptcy attorney just has to work harder to showcase lack of debt-repaying prowess.
- If you’re an “above median income” debtor, you must complete an extra bankruptcy step dubbed the Means Test.
- The Means Test is a bankruptcy formula that measures debt repayment ability. That ability is a function of whether anything remains from your income after deducting ALLOWED expenses. In the bankruptcy means test, your “income” is defined as the past six-month-average. The allowed expenses in the bankruptcy means test include standard allowances for living expenses + your secured debt payments (home and cars) + limited areas of actual living costs.
- If there’s nothing left after subtracting allowed expenses (i.e. you’re “in the red” or barely in the black), then you presumably (more readily) qualify for chapter 7 bankruptcy. In other words you “pass” the means test. Woohoo!
- You can start with a very-high income figure, but still pass the means test IF you have certain high expenses, such as a mortgage, car payments, child care and taxes.
C. What if You Fail the Chapter 7 Bankruptcy Means Test?
The whole point of the chapter 7 bankruptcy means test is to test whether (on paper) you have the… means to repay debt. If the “income” less “expenses” means-test formula shows excess left-over income, then you “fail.” If you receive a failing grade, then two good options still apply:
- You (well, your San Diego bankruptcy attorney) can argue that the means test is skewed and that you should still qualify for chapter 7 bankruptcy. A mis-representative means test may result if your last-six-months income (upon which the test rests) had been far higher than present income (e.g. due to job loss or demotion) and there’s no recovery in sight. OR
- You can opt for Chapter 13 Bankruptcy. The left-over or disposable income reflected on the means test would be applied to monthly-repayment of debt. Chapter 13 bankruptcy is an excellent way to cancel your debts for payments of pennies on the dollar.
- : passing the means test doesn’t automatically qualify one for chapter 7 bankruptcy. You must still demonstrate that your actual (reasonable and necessary) expenses fully offset your income. This is significant if your actual expenses fall short of the standard allowances used in the chapter 7 bankruptcy means test.
III. How Much Debt Do You Need to File Chapter 7 Bankruptcy?
Chapter 7 bankruptcy has no minimum nor maximum debt requirement. The severity of a specific debt-level is subjective: it’s a function of your income and expenses & your ability to repay debt. Your San Diego bankruptcy attorney will carefully assess if you’re a good candidate for chapter 7 bankruptcy. Your bankruptcy lawyer can help you make an informed personal decision. If sitting on a fence, then simply ask
Catch this Bankruptcy Curve Ball: the applicable period for comparing your income against the median is the six months before the month of bankruptcy filing.
Above-median-income debtors may qualify for an exemption from the means test (i.e. you get to skip it) if the majority of debt is “non-consumer” (e.g. business debt or tax debt) or if criteria relating to military service apply.