CHAPTER 7 BANKRUPTCY ELIGIBILITY
Prior to October, 2005, anyone residing, domiciled, or having business property in the U.S. was eligible to file a Chapter 7 bankruptcy. In October, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act became effective. Under this legislation, a debtor must meet certain requirements to be eligible to file a Chapter 7 bankruptcy.
Eligibility Requirements
The eligibility requirements which must be met in order to file a Chapter 7 bankruptcy consist of two tiers: 1) the median income test and 2) the means test.
The Median Income Test
The median income test requires a debtor to show that his family or household income is less than the median income for a household of the same size in his state. If the debtor meets this burden, he is eligible to file a Chapter 7 case and need not satisfy the second prong of the eligibility test. If the debtor does not meet the median income requirement, he must satisfy the second prong of the eligibility test.
The Means Test
The second tier of the eligibility requirement is the means test. The means test was established as a method for determining whether the filing of a Chapter 7 case amounts to an abuse of the system.
Under the means test, a debtor must deduct certain eligible expenses from his gross monthly income to arrive at his net monthly income which is presumed to be available for payment to his general unsecured creditors. If the debtor's net monthly income is at least $166.67 or if he has $10,000 projected over five years available for payment to his general unsecured creditors, there is a presumption of abuse. On the other hand, if the debtor's net monthly income is less than $100 or if he has less than $6000 projected over a five year period, abuse is never presumed. If the debtor's net monthly income places him between these two extremes, abuse is presumed only if the debtor's projected net monthly income is sufficient to pay 25% of general unsecured claims over a five year period.
If the debtor fails the means test, he must file for Chapter 13 bankruptcy. If the Chapter 7 case has already been filed and abuse is found, the Chapter 7 Trustee or any other interested party may file a motion to dismiss or the case may be converted to a Chapter 13 case.
Exceptions to Eligibility Requirements
There are two exceptions to the eligibility requirements for filing a Chapter 7 case.
Non-Consumer Debt
If the debts are primarily non-consumer debts, the debtor is not required to satisfy the median income or means tests. This is the case when the majority of the debts are taxes, business debts, or other non-consumer debts.
Disabled Veterans
Disabled veterans are not required to satisfy the median income and means tests as long a the majority of the debt was incurred during a period of time when he or she was on active duty or performing homeland defense activities.
Getting Legal Help
The median income and means tests involve very technical calculations. If these calculations are done incorrectly, it could result in the dismissal of the debtor's case. Therefore, it's imperative that a debtor seek the assistance of an experienced bankruptcy attorney. A qualified bankruptcy attorney has the knowledge and the tools necessary to ensure that these calculations are accurate and that the bankruptcy petition is completed correctly.
