Are you eligible for Chapter 7 bankruptcy?

In this economy, Americans are struggling to make ends meet. As expenses pile up, you may find yourself drowning in bills and other debts. Fortunately, bankruptcy relief is a great debt-reducing strategy.

Chapter 7 debts generally include the following:

  • Credit cards
  • Unsecured personal loans
  • Medical and dental bills

Often, you can keep your home and many other possessions through the Chapter 7 bankruptcy process.

However, before you consider this debt-reducing option, you must qualify. The "means test" is used by bankruptcy courts to determine whether you are eligible for Chapter 7.

The "means test"

The first step of the test compares your income to the median income in your state for a family of the same size. If your income is lower than the median income, you probably qualify. Even if your income exceeds the threshold amount for a family your size, it does not mean that you cannot file. While having higher income may create the presumption of the need to file Chapter 13, if there are enough allowed expenses, Chapter 7 is permitted. The second step of the test will help determine if you qualify.

In the second step, specific allowable expenses (determined by the IRS) are deducted from your income to find your "disposable income." If your expected disposable income is less than $6,000 ($100/month) over a five-year period, you may qualify for Chapter 7. However, if your disposable income is more than $10,000 over this period, you may not be eligible.

If you are somewhere between these amounts, your disposable income over the next five years will be compared to a percentage of your unsecured debt to determine whether you have the ability to repay creditors. If your disposable income over a five-year period is less than 25 percent of your unsecured debt, you will likely meet the criteria for Chapter 7. However, if it is greater than 25 percent of your overall unsecured debt, Chapter 13 bankruptcy may be a superior option of you.

Assessing your eligibility for Chapter 7 is very complex. For example, if the majority of debts are business related, then the means test does not apply.

It is important to seek the help of an experienced bankruptcy attorney. A lawyer can help you assess your financial situation and make the appropriate calculations.