When Congress changed the bankruptcy laws in 2005, many people who wanted to file for Chapter 7 bankruptcy needed to qualify by passing a test which we call the Means Test.
The Means Test does not apply if most of your debts are:
- Business debts
- If you are a corporation,
- Pther type of business entity
People who have filed another bankruptcy case in the recent past are not allowed to file again without special Bankruptcy Court permission. In conclusion, individuals cannot remove debts in a Chapter 7 case if they have previously eliminated their debts in an earlier Chapter 7 case within the last 8 years, or in an earlier Chapter 13 case within the last 6 years.
There are good reasons not to file a Chapter 7 bankruptcy, even if you are eligible to do so.
- Not all debts are eliminated in Chapter 7.
- You may lose property or a business that you want to keep.
There are two basic rules for a personal Chapter 7 Bankruptcy.
Rule 1: bankruptcy eliminates any legal obligation to pay debts that existed when the bankruptcy case was filed.
Rule 2: property will be taken and sold to pay the creditors. For most people, Rule 1 is generally true and Rule 2 is generally false.
Rule No. 1: Elimination of the Debt
Most debts are removed in a Chapter 7 bankruptcy. There are three major exceptions to this rule. First, some types of debts cannot be affected by bankruptcy, these debts are described as “non-dischargeable”. Second, you may want to keep some debts (ie family members or car loans.) Third are debts which are secured by your home, your car or other property. These debts need to remain if you want to keep the property.
Non-dischargeable debts are those which have not been “discharged” or eliminated. Your legal responsibility to pay the debt, and the creditor’s right to force you to pay the debt both remain even after the bankruptcy case is over. Here is a partial list of those which are most common:
- Most, but not all taxes
- Child, spousal and family support debts
- Non-support debts which are related to a divorce or separation
- Most, but not all student loans
- Damages caused by driving, flying or boating under the influence
- Debts related to false statements (such as loan applications) or fraud
- Damages caused by intentional injuries
- Stolen money held in trust
If you want to keep, or reaffirm, certain debts, your request must be reviewed and approved by the Bankruptcy Court.
Rule No. 2. Loss of property
People who file bankruptcy generally get to keep three kinds of property:
- Exempt property – usually determined by State law
- Fully mortgaged or over-mortgaged property; and
- Property that has no value or cannot be sold
Even though you may get to keep certain property in Chapter 7 bankruptcy, this property cannot be sold during the Chapter 7 case without special permission. You need an attorney to help you get this permission.
The Means Test
The Chapter 7 means test is a formula applied to determine whether or not you should have enough money available to make some minimal payment to creditors in a Chapter 13 Bankruptcy plan.
The goal is to reserve Chapter 7 bankruptcy for those who really have no means to pay and to push those who have available income into Chapter 13 bankruptcy plans, so that their creditors will receive at least partial payment.
Finally, you can still pass the Means Test if you have exceptional circumstances which a Judge decides are appropriate.
Debtors who cannot pass the Means Test may still be eligible to file Chapter 11 or Chapter 13.
If you’re looking for an easy way to determine your eligibility under the Chapter 7 means test, use our online means test calculator.
Here Are Some Reasons Not to File Chapter 7 Bankruptcy
1. You want to keep property with equity which is not exempt. In some cases the Chapter 7 trustee will allow you buy this property back.
2. You are behind in making loan payments on property you want to keep and you cannot earn or borrow enough money fast enough to pay the cash value of the property to your creditors. Chapter 13 is much better for dealing with these situations, but in some cases involving car loans which are more than 910 days old and where the amount of the loan is more than the value of the car, you may be able to make special arrangements to keep the car and pay only the car’s fair market value.
3. You have significant debts which are not dischargeable. Again, Chapter 11 or 13 are better able to handle these situations.
4. You have filed another recent bankruptcy and are not eligible to receive another Chapter 7 discharge.