Despite the increasing popularity of Chapter 13, Chapter 7 is still the most common type of individual bankruptcy in Massachusetts. Unlike in Chapter 13, you do not pay part of your debts back in monthly installments. If you qualify for Chapter 7 and comply with the procedures and disclosure requirements, most of your debts will be discharged. So, how do you qualify?
Qualifying for Chapter 7
Qualifying for Chapter 7 is primarily based on income. The system only allows people who cannot afford to pay their debts to succeed in Chapter 7. The bankruptcy laws determine if you can pay, but the general rule is that if you have monthly excess income and can afford to pay some of your debts, you file Chapter 13, which has many advantages of its own. However, if you can’t afford that, Chapter 7 is often available and a good option..
The Bankruptcy Means Test
There are two ways that the bankruptcy system decides if you qualify for Chapter 7. The main one is the means test. Only certain people are even subject to the means test. If you make more than the median income (by family size) you must take the means test. If you make less, you do not have to. In Massachusetts, here’s the median income by family size (for cases filed after May 1, 2017):
- Family of one: $61,102
- Family of two: $76,414
- Family of three: $93,755
- Family of four: $113,651
- Add $8,400 for each additional family member.
If you are subject to the means test, you often will not qualify for Chapter 7. However, this is not cut and dry. It depends on the amount of your secured debt payments, county of residence, marital status, medical issues, and a variety of other factors. These items are factored into your means test and, in part, determine whether you “pass.” If you want to know, contact us and we’ll go over your details and let you know.
Even if you “pass” the means test or do not have to take it all, there remains what is known as the totality of the circumstances tests under Section 707(b)(3) of the Bankruptcy Code. This test asks the basic question (i.e. ability to pay) from a less technical perspective and can, at times, require that even people below the median income file Chapter 13 instead of Chapter 7. We will tell you if this test will affect you during a consultation.
Can you file Chapter 7 if you are above the median income?
Sometimes. Some lawyers will automatically put people who are above the median income into Chapter 13. However, as I mentioned, the only thing that being above the median income does is make you subject to the means test. It is sometimes possible to pass the means test and still qualify for Chapter 7 despite being above the median income.
But to understand this, it is important to understand the big picture of what the means test actually does. After taking the six months of income before a bankruptcy and averaging it, certain deductions are made. Some of these are just standard allowances based on location, like for rent, for example. However, some of the deductions are based on your real life, and with those, you are not held to standard numbers. Examples of deductions that are based on individual spending habits include, mortgage payments, car payments, child support payments, day care, and out-of-pocket medical expenses. These are some of the variable deductible expenses that tend to be larger. Because they are often large, when they do exist, they can tip the balance and make someone above the median income pass the means test. On the other hand, without large expenses of these types, passing the means test is unlikely if you are above the median income.
What Debts are Discharged in Chapter 7?
Most debts are discharged in Chapter 7. Credit cards, unsecured personal loans, medical debt, car repossession deficiencies are just some examples of the types of debts that are generally dischargeable.
What Debts are NOT Discharged in Chapter 7?
Not all debts are discharged in Chapter 7. Student loans, recent taxes, and most divorce-related debts are non dischargeable.
How will Chapter 7 affect my credit?
Chapter 7 stays on your credit report for ten years from the date of filing. This does not destroy your credit for the whole ten years. Most people think it does. What it does do is put a negative mark on your credit for the ten-year period. As time passes the weight given to the bankruptcy by the credit bureaus gets lighter; after ten years it’s gone completely.
Will I Lose my Property in Chapter 7?
Chapter 7 is a liquidation. What this means is that, in theory at least, you give up all of your non-exempt property for a discharge of your debts. In reality, most people have very little property, so they do not have to give up any of it in Chapter 7.
If you do have assets that are not exempt and want to keep them, you cannot do so in a Chapter 7 and will need to file a Chapter 13. You can learn what will happen to your assets in a Chapter 7 bankruptcy by calling us and answering all of our questions honestly.
What are the Limits of Chapter 7?
In Chapter 7 cases you cannot stop foreclosures by curing mortgage arrears like you can in Chapter 13 cases. You can also not cram down car loans, strip off wholly unsecured second and third mortgages, and pay off nondischargeable tax debts. Chapter 13 offers more flexibility and options, which is one of its chief advantages over Chapter 7. However, sometimes Chapter 7 is the perfect remedy to financial problems that you just can’t fix any other way.
You can give us a call at 617-338-9400 or submit this form if you want to get a free consultation and fee quote for your case.