bankruptcy chapter 7: What You Need to Know

First Name:
 Last Name:
Email Address:
 Zip Code:
Primary Phone:
- - 		Alternate Phone:
- -
Preferred Contact Time:
Yes! I would like to receive other
helpful financial tips and offers.
Do you have at least $10,000 in credit card debt? Yes No
Unsecured Debt Amount:
Debt Amount:

Examples of Unsecured debt include:

  • Credit Cards
  • Department Store Credit Cards
  • Oil/Gas Credit Cards
  • Legal Bills
  • Personal loans (without collateral)
  • Cell Phone Bills
  • Credit Lines
**The following ARE NOT eligible**
  • Student Loans
  • Mortgage Payments
  • Car Payments
  • Secured Loans
  • Income Tax Payments
we protect your privacy, see our privacy policy

Is Chapter 7 Bankruptcy for Me?

I need to file for bankruptcy? Is chapter 7 right for me? That answer depends on the means test. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 makes it harder for people to file for bankruptcy protection under chapter 7. What is the means test and what does it mean for you?

First, a bit about chapter 7. It is said to give debtors a “fresh start” by wiping out all dischargeable debts. There are exceptions, such as certain tax debts, student loans, or debt incurred within ninety days of filing, that are not able to be eliminated. Overall, though, the debt is cleared, allowing the filer to get out from under crushing debt.

The new bankruptcy laws were passed in part because of abuses of chapter 7 bankruptcies. People were filing for relief from their debt when they had adequate income to file under chapter 13, which requires reorganization and repayment of debt. This effectively cheats the creditor out of any money owed them. It also turned out to hurt the people who need help most, who now have to undergo a process to determine their ability to pay debt. This process is the means test.

The first part of the test is to determine whether or not the debtor makes less than the state’s average. For instance, the average median income of residents in Virginia is about $53,275. If you made more than that, you would not be eligible for chapter 7, though chapter 13 may still be an option. If you made less, than may still be able to file for chapter 7.

The next part of the means test involves calculating your ability to repay debt. Your income, minus living expenses, is multiplied by 60. This will determine your disposable income over the next five years. If your disposable income is more than $10,000 over a five year period, you cannot file for bankruptcy under chapter 7. Chapter 13 may still be an option because you have been shown to have at least $166 per month to pay debt.

If you have less than $166 per month of disposable income but make more than the state median, the next part of the test is to determine whether you have $100 in disposable income and can pay twenty-five percent of your unsecured debt over sixty months. If so, you cannot file chapter 7 but may be able to file chapter 13. If you do not have $100 of disposable income per month, then you may still have chapter 7 as an option.

For example, say you have $75,000 worth of debt and $150 a month in disposable income. $150 is multiplied by 60 (five years), which is 9000. Because 9000 is less than twenty-five percent of your debt, you can still file for chapter 7. Now say your debt was $30,000 and you had $150 per month of disposable income (or $9000). $9000 is more than twenty-five percent of your total debt so you would not be able to file chapter 7 bankruptcy.

You should be able to figure out if you are eligible to file for chapter 7 bankruptcy by taking your income and deducting living expenses. If you are left with $10,000 in disposable income over the next sixty months, you cannot file. If you have less than $6000, you probably can. If the disposable income is between $6000 and $10000, then see if it is above twenty-five percent of your debt. If it is, you can still file. If not, chapter 13 is the answer.

You should be able to figure it out like that, but in reality, the figures for your living expenses are not based on reality. They are based on what the IRS says your living expenses are. The result is that sometimes the court will say you have more disposable income than you actually do.

It is complicated to file for bankruptcy. Chapter 7 laws have changed and it may be harder to get the debt relief you need. It can be a huge relief if you qualify; if not, chapter 13 is your next option. No matter which type of bankruptcy you file for, you should exhaust your other options first, like budgeting, cutting expenses, or debt settlement. These can save you the stress that comes with bankruptcy.