Prior to October 17, 2005, it was largely up to a bankruptcy judge to decide whether a debtor met Chapter 7 requirements. Judges, therefore, could use substantial discretion when assessing the debtor's financial situation. As a result, under the old law, most filers chose to have debt discharged even if they were financially capable of repaying the debt in a Chapter 13 repayment plan. Consequently, the intent of current bankruptcy law is to weed out filers who can afford to repay some debt.
Under the new law, a debtor must qualify for Chapter 7 by meeting certain criteria. If the debtor fails to meet Chapter 7 requirements, a bankruptcy court can convert the case to a Chapter 13 bankruptcy. With the exception of disabled veterans that file to eliminate debt that was incurred while on active military duty or filers with debt that primarily came from operating a business, all other filers must meet Chapter 7 requirements.
The following are circumstances in which a debtor is not eligible for Chapter 7.
1. The Debtor's Income is Too High
Eligibility for Chapter 7 requires a determination of whether a filer's income is too high. The "means test" determines whether a debtor qualifies for Chapter 7. The first part of the test requires the debtor to compare their current monthly income -- the average income in the six months preceding the application for bankruptcy -- with their state's median income.
Eligible monthly income includes the following:
- wages, salary, tips, bonuses, overtime, and commissions
- gross income from a business, profession, or a farm
- interest, dividends, and royalties
- rents and real property income
- regular child support or spousal support
- unemployment compensation
- pension and retirement income
- workers' compensation
- annuity payments
- state disability insurance
A filer does not have to include income tax refunds and payments from Social Security retirement benefits.
If the filer's current monthly income is equal to or below the state's median, then the debtor can file for Chapter 7. If, on the other hand, the filer's income exceeds their state's median family income, the filer must pass the second part of the means test to qualify for Chapter 7.
2. The Filer Can Repay Some Debt
If a filer's income is more than their state's median income, it is necessary to look at how much disposable income the filer has left after paying "allowed" monthly expenses, such as rent and
food, to determine whether the filer has enough money to pay some of their unsecured creditors through a Chapter 13 repayment plan. If the filer has a certain amount of income left over to pay some unsecured creditors, then the court will dismiss the Chapter 7 filing.
3. Debt was Previously Discharged in Bankruptcy
If a filer discharged debt under a Chapter 7 bankruptcy within the past eight years or under a Chapter 13 bankruptcy within the past six years, then the debtor is ineligible for Chapter 7. The time limitation runs from the date when the debtor filed for the previous bankruptcy.
4. A Previous Bankruptcy Case was Dismissed within the Previous 180 Days
A filer is ineligible if the dismissal of a previous Chapter 7 or Chapter 13 bankruptcy case occurred within the past 180 days for any of the following reasons:
- The filer violated a court order
- The previous bankruptcy case was considered fraudulent or constituted abuse on the court
- The filer requested a dismissal after a creditor asked the court to lift the automatic stay
5. The Debtor Failed to Meet the Credit Counseling Requirement
Within 180 days prior to filing for Chapter 7, a debtor must participate in credit counseling with a nonprofit agency approved by the U.S. Trustee's office. The purpose of credit counseling is to help the debtor determine whether other options besides bankruptcy are available. All debtors must participate in credit counseling unless an exception applies. Exceptions include physical disability, mental incapacity, or the debtor's service on active duty in a military combat zone. When counseling has concluded, the debtor will receive a certificate of completion to submit to the bankruptcy court when filing.
The Debtor Defrauded Creditors
A bankruptcy court may discharge a bankruptcy case if it appears that the filer has attempted to defraud creditors. The following types of actions by a debtor within a few years of filing for bankruptcy may indicate fraud in the court's eyes:
- The debtor transfers property to friends and family members
- The debtor mutilates or destroys property
- The debtor purchases luxury items
- The debtor lies about income and debt on a credit application
A filer signs bankruptcy papers under "penalty of perjury," so providing false information may not only lead to the dismissal of a debtor's case, but may also lead to charges of perjury or fraud on the court.