Chapter 7, while it is an effective tool for dealing with debt, particularly massive amounts of debt, is not available to everyone. If you are in certain financial circumstances, you will not be allowed to file for Chapter 7, including:
You Have the Income to Repay Debts: While under the old bankruptcy law, there were no clear rules concerning this, the new bankruptcy law contains clear and specific guidelines governing who can file for Chapter 7 and who has to file for Chapter 13 (which involves repayment of debts). Chapter 7 is almost always applicable for disabled veterans who incurred debt while on active duty, as well as those whose debts come from the operation of a business. There are more stringent requirements for those who do not fall into these categories:
The first step is to compare your current monthly income with the median income for a family of your size in your state. Current monthly income means your average income over the 6 months before you filed. If your current monthly income is less than or equal to the median in your area, you can file for Chapter 7. However, in the event that your average monthly income is greater than the median, you are required to take the “means test,” to determine if you can file for Chapter 7.
The “means test” determines if you have sufficient disposable income, after repaying required debts and allowing your necessary expenses, to repay some portion of your unsecured debts, over the course of a 5-year repayment plan. If this is possible, then you cannot file for Chapter 7 and are limited to Chapter 13.
Previously Received Discharges: If you have filed for Chapter 7 and obtained a discharge of your debts within the preceding eight years, or have filed for Chapter 13 and received a discharge within the preceding six years, you cannot file for Chapter 7 bankruptcy.
Dismissal Within Previous 180 Days: You cannot file for Chapter 7 if you filed for Chapter 7 or Chapter 13 within the preceding 180 and had the case dismissed due to:
- violation of a court order
- fraudulent filing or abuse of the bankruptcy system
- you requested a dismissal after a creditor requested relief from the automatic stay
Defrauding Creditors: A bankruptcy court could dismiss your case if it appears that you have attempted to defraud creditors or hide assets so that you could keep them. Certain actions are obvious indicators to the court of this type of illegal action and, if engaged in prior to filing, may result in the dismissal of your case. Some of these are:
- Giving assets to friends and relatives so that they will not be found by the bankruptcy court
- Purchasing luxury items when you were clearly in significant debt and unable to pay for them
- Hiding property from a spouse during divorce proceedings
- Lying about income or debt on a credit application
- Finally, all of your bankruptcy papers are filed under the penalty of perjury. That is, if you deliberately attempt to deceive, by failing to disclose property, omitting information, using a false Social Security number, etc, and these actions are discovered, your case will be dismissed and you will be prosecuted for fraud.