Five realities about whether you qualify under Chapter 7.
One of the biggest areas of confusion about bankruptcy is whether or not you qualify to file a Chapter 7 case.
If it’s the right tool for you, the odds are very high that you quality. The following five points get right to the heart of what you need to know.
1. Bad Publicity
Many people think that qualifying for “straight bankruptcy” is hard. Their attitudes range anywhere from a vague feeling to a firm conviction about this. From my countless conversations with new clients, I believe this impression is left over from a major overhaul of the Bankruptcy Code more than 7 years ago. That “reform,” which arose from a notion that too many bankruptcies were being filed, was indeed loudly trumpeted as promoting “Bankruptcy Abuse Prevention” by making it harder to file bankruptcy, especially under Chapter 7.
That quite clearly was in fact the intention of the law’s promoters. But for the vast majority of people for whom Chapter 7 is the best option, they continue to qualify for it.
2. The Confusing “Reform” Has Prolonged the Misinformation
The “Bankruptcy Abuse Prevention” Act dumped an astoundingly difficult to understand set of changes onto the Bankruptcy Code. In fact, parts are downright impossible to understand because they are directly contradicted by other parts. So bankruptcy judges and appeals judges all the way up to the U.S. Supreme Court have been scratching their heads trying to make sense of the insensible. Sorting out the layers of statutory contradictions and ambiguities through the court system takes many, many years. In the meantime, not surprisingly different courts looking at the exact same gibberish arrive at different rulings. If it’s difficult for high judges to make any sense of these laws, it’s only natural for ordinary people to have misimpressions about it. In this environment it’s easy to see how a concern about qualifying to file under this now not-so-new law still gets blown way out of proportion.
3. Most Can “Skip” the “Means Test”
Parts of the “means test”–the major mechanism now for qualifying under Chapter 7—are mind-numbingly confusing, but many people can avoid all that simply by virtue of their income. Without getting into the calculations here, basically if your “income” (as specially defined for this purpose) before filing was no more than the published median income amount for your state and size of family, then you qualify for Chapter 7 without needing to go through any more of the “means test.”
Also, certain kinds of folks can skip the “means test” no matter the amount of their income, specifically present or recent business owners who have more business debt than consumer debt.
4. Passing the “Means Test” Can Be Easy
Even if you are a consumer debtor whose “income” IS higher than the applicable median income amount, through some creative but perfectly legitimate timing strategies you may well be able to lower your “income” to bring it under the applicable median amount.
And even if that’s not possible, you can often fly through the “means test” by subtracting appropriate expenses from your income to show you have either no “disposable income” or not enough to cause a problem. Either way, you qualify for Chapter 7.
5. Chapter 13 is Sometimes the Better Option
The purpose of the “means test” is to make people who have the “means” pay back some of their debts through a Chapter 13 case. In the relatively few times that a person does not qualify under Chapter 7 and so has to do a Chapter 13 case, usually the amount that must be paid in the Chapter 13 case to the creditors is much less than the total debt, making it not such a bad deal. Also, often when a person does not qualify under Chapter 7, Chapter 13 may have been the better choice anyway. It’s not unusual that a person who “just wants to file Chapter 7 and get it over with” learns that Chapter 13 comes with surprising advantages, making it the debtor’s first choice regardless whether the person would or would not pass the “means test.”