What is Chapter 7 and how do I qualify?

A sudden and significant expense such as an unexpected medical bill can tax the finances of many Americans. As a result, many find that they cannot meet other financial obligations. Those who turn to bankruptcy to help manage their debts find that they can choose (with a few exceptions) between Chapter 7 or Chapter 13 bankruptcy. For most people with little or no income or assets, Chapter 7 is often the better option.

The reason for this is because unlike Chapter 13, Chapter 7 bankruptcy does not require a regular or minimum level of income. In Chapter 13, the debtor must pay off some or all of his debt according to a repayment plan over a three to five-year period, so a regular and sufficient income is necessary to successfully do this.

Since there is no repayment plan in Chapter 7, it is ideal for those with little or no income. In Chapter 7, the debtor’s assets are liquidated, or sold off, to pay his or her debts. Although this sounds like everything is taken away, this is not the case in actuality. Under the bankruptcy laws, most important property such as a house, car, furnishings and other personal belongings is exempt from the sale.

Most debtors who qualify for Chapter 7 bankruptcy do not have many (if any) assets that are not exempt. As a result, the majority of debtors lose little or no property during the Chapter 7 process. Once the sale of any nonexempt assets has been completed, the debtor receives a discharge of most of the remaining debt, meaning that his or her obligation to repay it is eliminated.

The Chapter 7 process is typically shorter than the Chapter 13. Many Chapter 7 bankruptcies can be completed in as little as two to three months. Chapter 13, on the other hand, typically takes at least three years.

Qualifying for relief

Although Chapter 7 does not have a minimum income requirement, not everyone can qualify. Under the bankruptcy laws, all debtors seeking Chapter 7 relief must pass a means test. Debtors with incomes less than the median income for an equivalent household size in their state automatically qualify.

Debtors with incomes over the median can still qualify in certain circumstances. In this situation, a court must examine the debtor’s income that is left over after paying necessary expenses (e.g. housing expenses). If the court finds that the debtor has a sufficient amount left over to pay down his or her other debts, it may order the debtor to file for Chapter 13 instead.

An attorney can help

Bankruptcy law is very complicated and full of traps for the unwary. There is not a one-size-fits-all approach that would work for every debtor. If you are struggling with unmanageable debt, it is important to seek the advice of an experienced bankruptcy attorney. An attorney can consider your debt situation and advise you of your options that would serve your best interests.