Technically, any individual can file for Chapter 7 bankruptcy unless the debtor, in the preceding 180 days, either:
- Had a bankruptcy petition dismissed because he or she willfully failed to appear in court or to comply with orders of the court, or
- Voluntarily dismissed a bankruptcy case after secured creditors sought leave of the court to recover collateral
A bankruptcy filing will also typically be dismissed if the debtor has not completed the required credit counseling in advance of filing and submitted a certificate of completion with the bankruptcy petition.
Of course, when people ask whether they can file Chapter 7, what they generally really want to know is whether they can use the Chapter 7 bankruptcy process to discharge unsecured debt. That is, after all, the goal of a Chapter 7 case. The answer to that question is a bit more involved.
Bars to a Successful Chapter 7 Case
Means Test Qualification
The 2005 revisions to the U.S. Bankruptcy Code included provisions to ensure that bankruptcy filings weren’t “abusive”–in other words, to make sure that people filing for Chapter 7 bankruptcy and discharging debt really were in financial crisis and hadn’t just decided it would be easier not to have to pay. The multi-step financial test associated with that analysis is known as the Chapter 7 “means test.”
If the debtor doesn’t pass the means test, the Chapter 7 bankruptcy case will either be dismissed or converted to a Chapter 13 case. So, it is in a debtor’s best interest to do the math in advance, ideally with the help of a qualified bankruptcy attorney.
For many people, the analysis is quick and easy: if the debtor’s income is below the median income in his or her state for a household of the same size, the filing is presumed not to be abusive and the debtor doesn’t have to complete the means test. For those with above-median incomes, the next step is to calculate projected disposable income over the next five years. This is accomplished by deducting allowable monthly expenses from monthly income and then multiplying by 60. However, not all expenses are included in this calculation, and some of the expenses you’ll deduct will be based on IRS standards rather than the actual amount you pay.
If disposable income–the amount left over when you’ve deducted allowable expenses from income, is less than $8,175, there’s no presumption of abuse. The calculation stops and the debtor can move forward. If disposable income exceeds $13,650, a presumption of abuse arises and the debtor can’t pursue Chapter 7 bankruptcy unless special circumstances apply.
These dollar values are scheduled to update in 2022.
For debtors who fall into the gray area with at least $8,175 but not more than $13,650 in disposable income over five years, there is another step–determining whether the leftover income is enough to pay 25% or more of unsecured, non-priority debts over five years. If not, there is no presumption of abuse and the debtor may proceed. But, if the debtor will have sufficient disposable income to pay at least 25% of those debts, the presumption of abuse arises. Unless there are special circumstances, the debtor will be unable to proceed with Chapter 7 bankruptcy, though Chapter 13 may be an option.
Time Bars to Discharge
A debtor will be disqualified from receiving a discharge in a Chapter 7 bankruptcy case if he or she:
- Was granted a discharge in a previous bankruptcy case that commenced within 8 years prior to the filing of the current petition, or
- Within one year prior to the filing of the petition, in another case:
- Transferred, destroyed or concealed property with intent to hinder or defraud a creditor,
- Concealed, destroyed, or falsified financial records,
- Made a false claim or provided a false account,
- Failed to satisfactorily explain loss of assets, or
- Refused to obey an order of the court or respond to material questions
Jeopardizing a Chapter 7 Discharge
A would-be Chapter 7 debtor passes the means test and is otherwise qualified to receive a discharge can usually eliminate most unsecured debts in bankruptcy–if he or she plays by the rules. It’s important to be aware that the bankruptcy discharge isn’t guaranteed. Rather, a discharge can be denied if:
- In the Chapter 7 case, the debtor commits any of the acts described in the section above, such as transferring property to defraud creditors, or
- The debtor fails to complete the required financial education course after filing the petition but prior to requesting a discharge
For most debtors, the Chapter 7 process is relatively painless, and debts can typically be discharged in 4-6 months. However, there are several mistakes a debtor can make that will derail a Chapter 7 case or lead to denial of discharge. These include filing too soon after a prior discharge or disqualifying event, filing under Chapter 7 with too much income relative to expenses, and failing to follow the rules and provide complete and accurate information during the bankruptcy proceeding.
Working with an experienced bankruptcy attorney from the beginning can help to ensure that you’ve chosen the best solution for your circumstances, are fully qualified for the type of relief you choose to pursue, and understand exactly what is required of you to successfully complete your bankruptcy case and receive a discharge.
To learn more, schedule a free consultation with one of our experienced bankruptcy attorneys.