Chapter 7 Bankruptcy: Am I Eligible?
When people talk about “filing for bankruptcy” what they do not realize is that there is no single process or single relief designated as bankruptcy. There are six types of federal bankruptcy processes. The most common type of bankruptcy is Chapter 7.
What is Chapter 7 Bankruptcy?
Under Chapter 7 bankruptcy, a bankruptcy trustee is appointed. The trustee’s goal is to pay creditors as much as possible of what the debtor owes. The trustee gathers and assesses the debtor’s assets, with some exceptions, sells those assets, and uses the money from the sale to pay the debtor’s creditors. If an asset is not worth very much, the debtor may be allowed to keep it. If the debtor does not want to sell an asset, he or she can provide the trustee with the cash equivalent of the asset’s value. A trustee does not take assets to sell which are exempt from creditors such as homestead real estate, $1000 value in a motor vehicle and $1000 of other general personal property. A debtor not claiming the benefit of homestead can claim an additional $4000 wild card exemption for personal property.
Once the bankruptcy process has concluded, all of the debtor’s debts are discharged except debts that cannot be discharged through bankruptcy (such as child support, student loans, etc.) or debts that the court has declared will not be discharged.
Who is eligible?
Chapter 7 is available to debtors who:
- Have not received a bankruptcy discharge within the last 6-8 years, depending on the type of bankruptcy discharge that was received;
- Are not eligible for Chapter 13 bankruptcy; and
- Meet specific income guidelines.
A debtor can meet the required income guidelines in one of two ways: assessing median monthly income or passing a means test.
Median Income Test
If the debtor’s current monthly income is higher than their state’s median monthly income, the debtor must pass a means test. A debtor’s current monthly income is determined by taking the average income from the six months before he or she files for bankruptcy. If a debtor’s current monthly income is less than the state’s median monthly income, then he or she is not required to pass a means test, and is presumptively eligible to file for Chapter 7 bankruptcy.
For debtors whose current monthly income is higher than the state’s median monthly income, more complex assessments must be done to determine whether or not they are eligible. A means test is a calculation to determine whether or not the debtor has enough extra income, above necessary expenses, to repay some of his or her debts.
The calculations are completed by filling out a form, which requires a debtor to provide information about their income, debts, and expenses. Allowable expenses are expenses that will factor in to the calculation of disposable income. Determining whether certain expenses are “allowable” can be complicated. Allowable monthly expenses can include things like health care, housing, and transportation.
The amount of monthly income left over after calculating and subtracting allowable monthly expenses is considered disposable income. Depending on your disposable income calculation, you may be eligible to file for bankruptcy.
I think I might be eligible; now what?
Deciding whether or not to file bankruptcy is a big decision, and it is important to have an attorney by your side to support you through the process. There are many options, and it’s important to get advice and information about what option is right for you. To learn whether Chapter 7 bankruptcy is right for you, contact Carnal & Mansfield, P.A.. Our St. Petersburg legal team will help you make the best decision for you and your family.