Who Can File Chapter 7 Bankruptcy?

Who Can File  Chapter 7 Bankruptcy (Based on Status and Prior Bankruptcy Filings)? 

  • Persons or businesses can file Chapter 7 Bankruptcy. 
  • If married, you can file with or without your spouse. If unmarried, you cannot file with a partner. 
  • If you had a prior chapter 7 bankruptcy  discharge , you can’t file another chapter 7 bankruptcy for eight (8) years (from the filing date of the previous chapter 7).
  • If you had a prior  Chapter 13 Bankruptcy  discharge , you can’t file chapter 7 bankruptcy till six (6) years after that past chapter 13.  The six years start ticking from the prior bankruptcy case filing date.  An exception applies for high-level of debt repayment in the prior chapter 13 bankruptcy .

Who Can File Chapter 7 Bankruptcy (Based on income level)?

If your debts (including mortgage debt) are primarily (more than 50%) non-consumer (for example, taxes and business debt) then high income  does not adversely affect your eligibility. However, in most cases, the majority of debt our clients have is consumer debt, and they must demonstrate that they don’t “make too much.”  This is a one- to two-part determination. 

Step 1: Median Income in Bankruptcy

A starting point for chapter 7 bankruptcy eligibility is whether your gross income is below- or above-the-state’s gross median income.  It’s presumed in bankruptcy law that below-median-income persons can’t afford to repay debt. If your income’s below median (during a specific time period), then you can skip the “means test” (Step 2, below). But you must still show that your actual budget doesn’t yield any surplus funds (that would presumably be available to repay debt). 

These are the gross-median-income numbers in California as of November 1, 2020 (numbers typically update 3 times yearly; refer to the government website for current information) :

  • $62,171 for a household of one;
  • $82,418 for a household of two;
  • $91,605 for a household of three;
  • $105,232 for a household of four; and
  • Add $9,000 for each individual in excess of four 

Step 2: The Means Test in Bankruptcy

If your income’s above median, you likely still qualify for chapter 7 bankruptcy, but must complete a means test first. The means test in bankruptcy measures your ability or means to repay debt. To make the calculation we average your income over an applicable or representative period, then deduct certain standard and allowed expenses. If the subtraction puts you in the red or only marginally in the black, then you’ve passed the means test and presumptively (more likely) qualify for chapter 7 bankruptcy.  

The allowed expenses include contractually due secured debt payments, your tax liabilities and standard allowances for living expenses. It’s a very tricky form that can take hours to complete, even for a seasoned attorney.  The applicable income period is based on the six months prior to the month of anticipated bankruptcy filing. As the case is prepared, the means test may need to be recalculated, because the relevant income period shifts monthly.

You can start with a very-high income figure, but still pass the means test if you have correspondingly high expenses that are deemed necessary, like a substantial mortgage, car payments, child care and taxes. 

Exclusions: income from Social Security is not factored into the means test (and to the extent Social Security yields an actual budget surplus it doesn’t affect eligibility). In 2019, the “Haven Act” added VA disability to incomes excluded from the means test. COVID-related stimulus payments are likewise excluded from the income analysis. Finally, very limited exemptions from the means test apply to certain active-duty service members based on when they incurred their debts.

The means test (which is based on past income and incorporates  standard expenses) does not guarantee eligibility to file chapter 7. In parallel to the means test, we prepare schedules of actual projected (ongoing or future) income and expenses that must likewise not yield a surplus or savings. In some cases, persons’ income has recently increased or their actual expenses fall short of the offsetting standard allowances used in the means test. Such circumstances can challenge your ability to qualify despite passing the means test. In effect, the bankruptcy petition consists of redundancies that try to frustrate your ability to file. Fortunately, we’re here to help. 

What if You Fail the Chapter 7 Bankruptcy Means Test?

If you fail the means test, your can either opt to file chapter 13 bankruptcy (which has its own benefits) or your attorney can help you explain to the court that the means test is skewed and merits an exception.  For example, there may be a definite and sustained change to the income level reflected on the means test (which is an average of the prior six months).

How Much Debt Do You Need to File Chapter 7 Bankruptcy?

Chapter 7 bankruptcy has no minimum nor maximum debt requirement. Filing bankruptcy is a subjective decision that must be cost effective and take into account the limits on repeat filing. If struggling to repay debt is causing you to suffer, then it’s wise to consider bankruptcy as a responsible, active way to help your situation. With a free consultation, we can give you the knowledge to let you make an informed decision.