Chapter 7 - Who Is Eligible?

You can file for Chapter 7 bankruptcy unless: 1) you can afford to repay under Chapter 13 bankruptcy plan because you make more money than the median income in your state; or 2) you've previously received bankruptcy discharge/case dismissal; or 3) you haven't participated in mandatory credit counseling; or 4) engaged in fraudulent activities.

You can afford to eventually repay your debt under Chapter 13 bankruptcy plan

You need two figures to determine your eligibility for Chapter 7 bankruptcy: 1) your "average monthly income" in the six months before you file for bankruptcy; and 2) "median family income" in the state you file (see table below). If your income is below the median family income, your filing will not be presumed frivolous. To calculate your "average monthly income," you will have to add up all of the income you received in the six months prior to filing for Chapter 7 bankruptcy and divide it by six.

Average monthly income

To calculate this figure for Chapter 7 bankruptcy purposes, you have to include the following types of income:

- wages, tips, and commissions;

-gross income from business, profession, or farm;

- interest, dividends, and royalties;

- pensions and retirement income;

- rents and other income from real property;

- workers' compensation;

- disability insurance;

- unemployment compensation;

- child or spousal support;

- annuity payments;

- windfalls (for example, lottery winnings)

You do NOT have to include the following types of income for the Chapter 7 bankruptcy "average monthly income" calculation:

- Social Security retirement benefits;

- Social Security Insurance;

- Social Security Disability Insurance;

- Supplemental Security Income;

- Temporary Assistance for Needy Families;

- income tax refunds;

- payments to you as a victim of terrorism, domestic or international.

Once you've calculated your average monthly income, you need to compare it to the "median family income" for your state. If your average income is significantly higher than the applicable figure from the table below, you might have to file for Chapter 13 bankruptcy instead of Chapter 7 bankruptcy. To determine your eligibility for Chapter 13, you will have to do some calculations called the "means test."

Median family income for bankruptcy calculations

The median family income figures change approximately twice per year. The last several times that these figures were updated, the median income decreased in California and some other states. There are no definitive court guidelines to determine your household size but most courts adopt the census methodology, under which you can include all of the people that occupy your house/apt., whether they are related to you or not, or whether they are your dependents for tax purposes. Roommates, however, are not members of your household, unless you act as a single economic unit by commingling funds and sharing expenses. Children living with you part time as part of a joint custody arrangement are a trickier issue which is to be determined on a case-by-case basis.

As of February 1, 2012, median annual family income for a 1 earner in California is $47,683, for 2 earner family it is $61,539, and for a 3 earner family it is $66,050. Note that the figures above represent annual incomes, whereas you need to calculate your income for the last six months.

You've previously received bankruptcy discharge or case dismissal

You cannot wipe out your debt in Chapter 7 bankruptcy if: 1) you received a bankruptcy discharge in a previous Chapter 7 case filed within the last eight years, or 2) you received a bankruptcy discharge under Chapter 13 in a case filed within the previous six years. The six-year rule does not apply if you've paid at least 70% of your unsecured debts under Chapter 13 bankruptcy discharge.

You cannot receive a Chapter 7 bankruptcy discharge if your previous Chapter 7 or Chapter 13 bankruptcy case was dismissed within the last 180 days for one of the following reasons: 1) you violated a court order; or 2) requested the dismissal after a creditor asked to lift the automatic stay.

You haven't participated in mandatory credit counseling

Mandatory credit counseling is an easy requirement to meet, so don't let this small obstacle slow you down.

Fraud

If the bankruptcy trustee obtains evidence that you gave away your property to relatives, friends or favorite creditors shortly before filing, bought luxury, or engaged in similar suspicious activity, you may be ineligible to claim bankruptcy. Voluntary unemployment, not being able to explain how you got to the point where you are and where your money went will also raise red flags.