Macco Law Group, LLP

How to determine eligibility for Chapter 7 Bankruptcy

How to determine eligibility for Chapter 7 Bankruptcy

Filing for Chapter 7 bankruptcy enables people struggling with severe financial hardship to obtain a liquidation of their debts and a fresh financial start. Also known as liquidation bankruptcy, it requires the turning over of assets to a trustee who will sell them and use the proceeds to pay debt obligations. However, Chapter 7 is not intended to allow people to simply eliminate their debts without regard to actual necessity. There are strict eligibility requirements that limit who may actually take advantage of this debt relief mechanism.

The law aims to make Chapter 7 bankruptcy only available to those without sufficient income or resources to satisfy their debt obligations. The general eligibility test is called the “means test,” and it limits how high an income a person can have to qualify. Under the means test, a person’s monthly income generally must be lower than the median monthly income for a household of the same size. If the potential filer’s income is higher than the median income, he or she will not be eligible to file Chapter 7 unless the amount of money remaining at the end of each month after paying bills and all other monthly expenses-the person’s disposable income–is below a certain threshold.

In order to prove eligibility for filing for Chapter 7, a person must fill out a specific bankruptcy form, Form 22A. The form will enable a potential filer to determine whether or not he or she qualifies. If the means test is not satisfied, the person’s bankruptcy petition will be dismissed. Alternatively, he or she may be able to convert the bankruptcy petition to Chapter 13, instead of Chapter 7.

The completion of Form 22A requires the filer to input information related to income and expenses. The potential filer will need to review his or her own records to determine monthly income. Other information required by the form can be obtained from the IRS and the Census Bureau. That information can be located on the “Means Testing” page of the Department of Justice website.