In Chapter 7 bankruptcy, also called liquidation bankruptcy, your assets -- unless they are specifically protected or "exempt" from liquidation -- are sold to pay your debts. If your non-exempt assets do not have enough value to fully pay your outstanding debts, the bankruptcy court issues a discharge of many of your unpaid debts, erasing your obligation to pay them. However, not everyone qualifies to file under Chapter 7. You should be sure that you meet certain income guidelines and other requirements before filing your case.
Current Monthly Income
To determine whether you can file under Chapter 7, you must first determine your current monthly income. According to the federal bankruptcy code, your current monthly income is your average monthly income received over the six calendar months before you file for bankruptcy. If your current monthly income is less than the state median income for your state, you qualify to file chapter 7. You may not qualify if your income has recently decreased. For example, someone who just got laid off might not qualify, since his last six months' worth of income would reflect his earnings while he was working.
If your current monthly income is above your state’s median, you must pass a means test in order to qualify for filing Chapter 7 bankruptcy. The means test is designed to test your disposable income, so it takes into account your income and qualifying expenses. The calculations can get complex. You are also disqualified from filing Chapter 7 if your disposable income -- your combined current monthly income over five years less allowable expenses -- is too great. You can file Chapter 7 in these circumstances only by showing the court that you have special circumstances that justify additional expenses or adjustments. For example, if one of your children has extraordinary medical expenses, the court could allow you to file under Chapter 7 even if you cannot pass the means test.
Even if you qualify to file Chapter 7 based on your income level, you must meet other requirements. For example, you must complete credit counseling from an approved credit counseling agency within 180 days before your filing. You must prove to the court you completed counseling, typically by providing a completion certificate. You are also disqualified if you have obtained a bankruptcy discharge under a Chapter 7 or Chapter 11 case within the previous eight years. If you filed a previous bankruptcy case that was dismissed because of your failure to appear before the court or comply with court orders, or if you voluntarily dismissed your previous case under certain circumstances, you must wait 180 days to file again.
If you do not qualify for Chapter 7 protection, you may be able to clear up your debts by working with a credit counseling agency. You may qualify to file for other bankruptcy protection, such as filing under Chapter 13. To qualify to file under Chapter 13, you must have a regular income. Chapter 13 allows you to restructure your debts under a three- or five-year repayment plan. Under this court-approved plan, you will pay off your debts through a court-appointed trustee: you pay the trustee, who pays your creditors. At the end of your repayment plan, the court can discharge certain unpaid debts.