There are several main factors to see if you qualify file for Chapter 7 bankruptcy and to determine if it is the best option for you, even if you do qualify. The first consideration is whether there are any past bankruptcy filings in your past. The second is to see if you qualify by looking at the amount of your household income for the previous six months prior to filing. The third consideration is whether you have any unprotected property that could be liquidated or otherwise taken from you in the Chapter 7 bankruptcy.
The first thing that determines your eligibility for filing Chapter 7 are any past bankruptcy filings. You are allowed to file Chapter 7 once every eight years. This means eight years from the filing date, not the discharge date. If the eight years has not passed, you will have to file a Chapter 13 to obtain debt relief because you will not be eligible for Chapter 7.
The second consideration when looking at Chapter 7 is whether you qualify to file based on your income or not. To qualify you must pass something called the Means Test. Bankruptcy law requires that a person filing Chapter 7 submit all income information for the previous six months prior to filing in order to see if they pass this test. The Means Test can be a very long and complicated calculation looking at the last six months of your household income.
The first step of the Means Test is to see if your annual household income is higher than the average income of a household of your same size in Alabama. These average household incomes for each state can be found on IRS charts online and are updated periodically. To determine your annualized household income, they look at the last six months prior to filing as a kind of snapshot. The average last six months gross household income is then annualized, and if this annual household income is lower than the number on the chart (average household income for your family size in Alabama), then you pass the Means Test and can file Chapter 7, no questions asked.
However, if your annualized household income is above the average, then you must go through the second step for the means test. This step takes your average monthly household income for the previous six months and allows deductions of certain expenses. This budget determines if you have any disposable income on your monthly budget or not. The expenses allowed on this budget are listed in bankruptcy law, such as payroll taxes, insurance, and secured debt payments. You also get amounts for food, clothing, and other such household expenses from charts for a family of your size in Alabama (more IRS charts). If you have too much disposable income after deducting all of the expenses on this test, then you fail the Means Test and cannot file Chapter 7.
The third main consideration is property. When you file a Chapter 7 bankruptcy, something called a bankruptcy estate is opened up and everything you own is part of this estate. An attorney called a Trustee is appointed to your case to administer your estate. If you have unprotected equity in your home or car then the Trustee could hold an auction and sell the property and give the proceeds to your creditors. However, you can protect your property through things called bankruptcy exemptions. As long as you don’t have a lot of equity in your home (or personal property like vehicles or vacant land) then you can usually protect such equity and the Trustee would not be able to touch your property.
If you don’t have vacant land, homes with lots of equity in them, or other such property then you can file what is called a no asset Chapter 7 bankruptcy, which are what most Chapter 7 bankruptcies actually are. If you are filing alone, you can protect a little over $15,000 in equity in your home. You can have a little more than this and probably be alright, depending on the Trustee where you file at, due to closing costs and other expenses the Trustee takes into consideration, but you wouldn’t want to file a Chapter 7 bankruptcy if you had a significant amount more than this. This amount doubles (to over $30,000) of equity you can protect if you are married and filing together. You can protect a little over $7500 in personal property, which doubles to a little over $15,000 if you are married and filing jointly. This property consideration is important and you should talk to a local bankruptcy lawyer to determine whether your property would be at risk in a Chapter 7 bankruptcy where you live.
If you are eligible to file Chapter 7, and don’t have any significant property that you cannot protect, then you can file and get rid of all of your unsecured debt fairly quickly and easily. However it is important to take such property considerations into account, even if you do qualify based on your income, before deciding which type of bankruptcy to file or whether to file at all.