Two Hurdles to Chapter 7 Bankruptcy

Most people I meet with to discuss bankruptcy want to file a chapter 7 bankruptcy.  They may not know exactly what a chapter 7 is, but they want their debt to go away and go away and quickly as possible.  Chapter 7 bankruptcy is pretty good at doing this.

However, before take the plunge and file a chapter 7 case there are a couple of hurdles you must get over.

Pass the Means Test

No one said there would be tests!  But there is.  Back in 2005 Congress revamped the Bankruptcy Code and required that those people who wanted/needed to file a chapter 7 bankruptcy must pass a means test.  Which leads to the question, what is a “means test”.  Simply put, we are required to look at your household size and average monthly income.  If you make more than the average income for a household of your size, then you may be required to file a chapter 13 bankruptcy.

If you make at or below the average income for a household of your size then you will automatically qualify for a chapter 7 bankruptcy.  Even if your income is slightly over the average income the means tests provides a couple dozen deductions we can make that may get you below the threshold and qualify you for a chapter 7.  One other thing, notice I said “household” size not “family” size.  When doing the calculations for the means test we look at the total number of people living in your home, whether you are immediate family or not.

Don’t Lose Your Shirt – Non-Exempt Property

Chapter 7 is a liquidating bankruptcy.  This means that you will be required to disclose all of your assets.  And, if your assets are not protected by the exemption laws here in Arizona, there is a good chance you could lose them.  The bankruptcy trustee could seize the asset, sell it, and give the money to your creditors.

The good news is that most assets are protected.  Most have heard of the Homestead Exemption that, in Arizona, protects up to $150,000 in equity in your home.  There are also exemptions for cars, retirement accounts, wedding rings, household goods, etc.

However, if you have a valuable asset that does not fall under the protection of the exemption laws, chapter 7 might not be a good option.  An alternative is a chapter 13 bankruptcy which allows you to keep all your stuff, however you will be required to make a monthly payment to your creditors for five years.

Whether chapter 7 bankruptcy is a good option for you is a decision that you and your bankruptcy lawyer need to discuss.  Chapter 7 is a great tool in that is is relatively quick and does a great job of eliminating debt.  However, before you set your heart on this path make sure you qualify and that you won’t lose property through the process.