Who Qualifies for Chapter 7 Bankruptcy?

Not everyone can file for a Chapter 7 bankruptcy, and even after the bankruptcy petition is filed, other factors may cause a case to be dismissed, preventing a Chapter 7 discharge. Disqualifications include substantial income, a previous bankruptcy discharge or dismissal, or dishonesty, either to creditors or to the bankruptcy court.

Your Income is Great Enough to Qualify for a Chapter 13 Bankruptcy

Prior to 2005, people could choose to file either Chapter 7 or Chapter 13. Most bankruptcy petitioners chose Chapter 7 because it didn't require paying back debts and it was finished usually within 6 months compared to the 3 or 5 years required of a Chapter 13's repayment plan. However, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) introduced a means test to determine whether the bankruptcy petitioner filing for Chapter 7 is presumed abusive. The means test determines if the bankruptcy petitioner has an income that is greater than his state's median income. If his income is greater, then there are additional tests to see if he can repay at least some of what he owes to his unsecured creditors. Complete information can be found in here: The Means Test In Bankruptcy—Is There A Presumption Of Abuse?

If the petitioner fails the means test, he will have to file Chapter 13 and make payments to unsecured creditors over a 3 or 5 year period, unless he can show that special circumstances should rebut the presumption.

According to recent statistics by the U.S. Trustee's office, 94% of bankruptcy petitioners had incomes less than the state median, and of those who had higher incomes, only 10% were deemed abusive by the U.S. Trustee[i].

A Previous Bankruptcy Discharge or Dismissal

To prevent serial bankruptcy filings, the BAPCPA has time restraints for subsequent filings of bankruptcy after a previous discharge. Generally, you cannot file for Chapter 7 bankruptcy if you got a Chapter 7 discharge that was started within the last 8 years. You also cannot file if you commenced a Chapter 13 case within the previous 6 years, unless you got a discharge in good faith where you paid at least 70% of what you owed to your unsecured creditors.

You also cannot file for bankruptcy if you had a previous bankruptcy case for Chapter 7 or 13 that was dismissed within the past 180 days that was due to the debtor's willful failure to appear before the court or comply with court orders, or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they held liens. (11 U.S.C. §§ 109(g), 362(d) and (e)).

Credit Counseling

One thing that was commonly observed among bankruptcy petitioners was that they didn't know how to handle money or credit. So the BAPCPA requires that the debtor receive credit counseling from an approved credit counseling agency either in an individual or group briefing within 180 days before filing (11 U.S.C. §§ 109, 111). There are exceptions in emergency situations or where the U.S. Trustee or bankruptcy administrator has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during required credit counseling, it must be filed with the court.

Dishonesty and Fraud

The main purpose of bankruptcy is to give people a fresh start, to help them from falling into deep despair over debt that they cannot repay. But what the courts frown upon is when people use bankruptcy to try to either deprive creditors of money that they have or to use credit to buy things knowing that they are going to file for bankruptcy shortly. If such is the case, then your petition will either be denied or your case will be dismissed. Some of the common techniques considered dishonest are transferring assets to relatives or friends before filing, or going on a spending spree just before declaring bankruptcy, or hiding assets from your spouse in a divorce.

 Incorrect or Incomplete Information on Bankruptcy Forms

In bankruptcy, as in taxes, the filer has most of the information about his situation. Hence, the courts depend largely on the information that the debtor provides in his bankruptcy petition.

There is a great temptation not to list income or assets or to not name creditors who are your relatives or friends or to pay them off right before filing for bankruptcy. If the information on the bankruptcy forms is knowingly inaccurate or incomplete, then not only will the bankruptcy case be dismissed, but the courts may prosecute the petitioner for knowingly supplying false information or withholding relevant information.

The U.S. Trustee Program is designed to detect and punish fraud. In addition to the scrutiny of your petition by your case trustee, the U.S. Trustee also receives a copy of every bankruptcy petition, and scrutinizes it for possible fraud. If fraud is suspected, then either the case trustee or the U.S. Trustee will move to dismiss your case, and it will almost certainly be granted by the court. Furthermore, the BAPCPA requires the U.S. Trustee to audit at least 1 out of every 250 petitions, where an actual investigation will take place. These audits help the U.S. Trustee to determine how well it is rooting out fraud.

The key to prevent dismissal of your case is to be absolutely honest. The trustee or the court may also ask for additional information, and you should comply promptly and as best as possible; otherwise your case will be dismissed, your automatic stay will end, and none of your debts will be discharged.