Chapter 7 Debt Relief
CHAPTER 7 RELIEF IS A LIQUIDATION PLAN. Chapter 7 is designed for those individuals who are unable to repay the debts owed to creditors. Debtors must qualify for chapter 7 relief. An individual is ineligible for chapter 7 relief unless he waits eight (8) years from a previously discharged chapter 7 case or six (6) years from a previously discharged chapter 13 case. The chapter 7 debtor with primarily consumer debt must also satisfy two independent tests. [Individuals with primarily business debt are not subject to these requirements.] The first test is known as the Means Test. The second test analyzes the totality of the circumstances.
THE MEANS TEST CALCULATION IS A HISTORICAL ANALYSIS, A ‘LOOK-BACK’ IF YOU WILL. This test examines the debtor’s ability to repay creditors based on the all income earned by the debtor within the six full months prior to filing for bankruptcy relief.
*A debtor whose past income falls below the state median income level satisfies the Means Test and proceeds to the "totality of the circumstances" test in determining chapter 7 eligibility.
*A debtor whose past income exceeds the state median income level has to complete a second set of calculations which incorporate IRS allowances to determine if the Means Test is satisfied.
Pursuant to the Bankruptcy Code, all income derived within the six months prior to filing must be included in the Means Test calculation. Income includes unemployment compensation, pension and retirement benefits, alimony and child support, income derived from the operation of a business, wages, commissions, tips, contributions to household income from friends or family members, and all other sources of income regardless of the source. Social Security Benefits are excluded from the Means Test income calculation.
THE TOTALITY OF THE CIRCUMSTANCES TEST IS A FUTURE LOOKING ANALYSIS. This test examines the debtor’s ability to repay creditors based on the debtor’s current income and expenses. If the debtor has disposable income, it is presumed that debtor has the ability to repay creditors at least part of the debt owing. Disposable income is income that remains after a debtor pays all ordinary and necessary expenses. Debtors who have the ability to repay creditors are required by the Bankruptcy Code to do so, specifically through a chapter 13 plan.
The Office of the United States Trustee (UST) oversees the bankruptcy process and is charged with the responsibility of verifying debtors’ eligibility for chapter 7. The UST often requests the dismissal or conversion to chapter 13 of a chapter 7 case in which the debtor has disposable income but files under chapter 7 anyway.
THE DEBTOR WHO PASSES BOTH THE MEANS TEST AND TOTALITY OF THE CIRCUMSTANCES ANALYSIS IS ELIGIBLE FOR CHAPTER 7 RELIEF.
CHAPTER 7 DISCHARGES MOST BUT NOT ALL THE DEBT. Dischargeable debts typically include medical debt, credit card debt, personal loans, some judgments, payday loans, vehicle deficiencies, mortgage deficiencies, and certain tax debt.
MILLIONS OF PEOPLE HAVE USED CHAPTER 7 BANKRUPTCY RELIEF TO OBTAIN A FRESH START AND A NEW FINANCIAL FUTURE!