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Five Truths about Qualifying for Chapter 7 Bankruptcy

Not everyone who wants to file a Chapter 7 “straight bankruptcy” can do so. But most do. There is probably no topic that causes more confusion among people thinking about filing bankruptcy –do they qualify? Let me set the story straight.

1. Inaccurate publicity:  People think it’s difficult to qualify for filing bankruptcy because of lingering public memory of a major amendment of the bankruptcy code six years ago.  This “reform” was intended to make filing bankruptcy, and especially Chapter 7, more difficult, and its proponents were happy to proclaim this intent. This has stayed in the public’s mind even though the law actually did not make it harder for most people to file whichever Chapter they wanted.

2. Confusion breeds fear:  If you don’t think that it makes sense that a law which went into effect in the middle of the last decade continues to sow such misinformation, bear two things in mind. First, this set of amendments to the Bankruptcy Code was one of the most confusing, self-contradictory, and convoluted pieces of legislation ever to pass through Congress. (And that’s saying a lot!) Second, sorting out this sweeping set of statutory contradictions and ambiguities through the court system takes many years. Some of the important issues are just now making it to the U.S. Supreme Court. Others won’t be resolved for years. In an environment where the law is not reasonably clear, even common sense suggests “erring on the side of caution.” Add a dose of misinformation, and it’s easy to see why people assume the worst.

3. The new “Means Test” does not even apply to many bankruptcy filers:  The main new hoop to jump through to qualify for Chapter 7 has complications, but a large percent of filers avoid these altogether. If your annualized income during the six full calendar months before filing the bankruptcy—counting income from virtually every source other than social security—is less than the published median family income in your state for your size of family, then you qualify for Chapter 7, without needing to apply the “means test.” A large percentage of people filing bankruptcy have relatively low income, at least for a time, and so they dodge the “means test.”

4. The “Means Test” is often easy:  Even if your income IS higher than the applicable median, most of the time the expenses that you are allowed to subtract from your income enables you to pass the “means test” successfully. You end up showing you have no meaningful amount of “disposable income.”

5. Chapter 13 is often the preferred option anyway:  The point of the “means test” is to require people who have enough “disposable income” to pay some (or in rare cases all) of their debts through a Chapter 13 case. In the relatively few times this happens, usually the amount that must be paid in the Chapter 13 case to the creditors is much less than the total debt. Plus, Chapter 13 provides advantages over Chapter 7 in many, many situations, so it may be the first choice anyway, regardless whether the person would pass or fail the “means test.”