Many people considering bankruptcy are uncertain as to whether or not they qualify to file Chapter 7. Most people who want to file Chapter 7 bankruptcy are eligible to do so, and the concerns often stem from misinformation from friends and family or the internet. In 2019, more than 11,000 Chapter 7 bankruptcy cases were filed in Los Angeles alone. However, if you are exploring your options for resolving debt, you should be aware that there are some restrictions on who can file for Chapter 7 bankruptcy and when. And, there are some considerations that might make Chapter 7 bankruptcy a poor choice for some filers.
An experienced California bankruptcy attorney is your best source of information about your Chapter 7 bankruptcy eligibility and the factors you should consider when determining the best solution for you. The checklist below provides an overview of both the restrictions and the considerations you should take into account to help you start assessing your options.
Legal Restrictions and Limitations on Filing for Chapter 7 Bankruptcy
- Income eligibility. Since 2005, consumers filing for Chapter 7 bankruptcy must demonstrate that the filing is not abusive. In other words, the U.S. Bankruptcy Code requires Chapter 7 bankruptcy petitioners to show that they really need to file for Chapter 7 and aren’t just trying to get out of paying debts.
The first step in determining income eligibility is to compare your income to the median income in your state for a household of the same size. If your income is at or below the state median, there is no presumption of abuse, and you can generally proceed with a Chapter 7 filing. Median income figures are updated regularly. As of February of 2020, the applicable medians in California are:
- One person household: $59.286
- Two person household: $77,860
- Three person household: $86,665
- Four person household: $99,512
For each member of the household beyond four, $9,000 is added.
If your income is above the median, there is another, somewhat more complicated step. This step is known as the Chapter 7 means test.
The means test compares income with expenses to determine how much you should be able to put toward paying down debt across a five-year period. But, that formula isn’t as simple as it sounds. Not all expenses are considered, and those that are taken into account are based on legal standards that may not match up with your actual costs. If your income is above the median, it is generally best to consult a Los Angeles bankruptcy attorney about the likelihood that you are eligible for Chapter 7 bankruptcy.
- Past bankruptcy filings. While a past bankruptcy filing doesn’t preclude the filing of a Chapter 7 bankruptcy case, a prior bankruptcy case may mean that you are not eligible to receive a discharge in a Chapter 7 case. Although Chapter 13 Bankruptcy offers advantages outside the discharge of some debt, the core purpose of a Chapter 7 case is the bankruptcy discharge – – the elimination of legal responsibility for much unsecured debt. Therefore, a person who is ineligible for a Chapter 7 discharge will typically have no incentive to file.
Generally, a person who has received a discharge in a prior Chapter 7 case must wait eight years from the filing date of the first case to file another Chapter 7 bankruptcy case and be eligible for discharge. If the prior case was a Chapter 13 bankruptcy, the waiting period to file Chapter 7 and be eligible for a discharge is reduced to six years, and may not apply at all depending on the percentage of unsecured debt that was repaid in the Chapter 13 case.
- Restrictions from a bankruptcy court. In certain cases, where a bankruptcy petitioner has been found to have abused the process, committed fraud, or dismissed a case in response to an adversary proceeding, the petitioner may be banned from filing another case for a specific period of time. For example, a debtor is barred from filing a new bankruptcy case for 180 days if a prior petition was dismissed by the court because the debtor failed to follow the court’s orders or appear in court. The same time-bar applies when a debtor voluntarily dismisses a bankruptcy case after a creditor files a motion for relief from the automatic stay.
Factors That May Make Chapter 7 Bankruptcy Undesirable
- Possession of non-exempt assets. In a Chapter 7 bankruptcy case, non-exempt assets can be sold by the bankruptcy trustee in order to make partial payment to creditors. Most people who file for Chapter 7 bankruptcy do not have any non-exempt assets. However, high home values in the Los Angeles area present a problem for some.
California offers two different sets of exemptions, allowing those with higher home equity to swap larger exemptions in other categories for a homestead exemption. Still, exemptions aren’t always sufficient to protect all of the property a person or couple wants to keep. Those few who do have non-exempt assets they wish to keep often find that Chapter 13 bankruptcy is a better alternative. In a Chapter 13 bankruptcy case, the debtor pays off some or all of the outstanding debt over time, and is not required to surrender non-exempt assets.
- Delinquent or unmanageable secured debt. While a Chapter 7 bankruptcy case can be an excellent solution for people who are overwhelmed by unsecured debt such as credit card balances and medical bills, secured debt cannot be discharged unless the property serving as collateral is surrendered. So, Chapter 7 generally doesn’t offer a solution for someone who is behind on his or her automobile loan or mortgage and wishes to keep the vehicle or the home. Here, also, Chapter 13 bankruptcy may provide a solution by allowing the filer to spread out past-due balances across three to five years. In some cases, the outstanding balance and/or interest rate may even be reduced.
Learn More about Chapter 7 Bankruptcy
If you’re considering Chapter 7 bankruptcy, the next step is to speak with an experienced Los Angeles bankruptcy attorney. At Borowitz & Clark, we offer free consultations to help people in tough financial circumstances make good decisions for the future. You can schedule yours right now by calling 877-439-9717 or filling out the contact form on this site.