Not everyone who wants to file a Chapter 7 “straight bankruptcy” can do so. But most can. There’s probably no topic that causes more confusion to people thinking about filing bankruptcy –do they qualify? Let me set the record straight.
1. Inaccurate publicity:
Many people think it’s difficult to qualify for filing bankruptcy because of the lingering memory of the changes made to the bankruptcy laws in October 2005. This so-called “reform” was intended to make filing bankruptcy, and especially Chapter 7, more difficult, and its proponents (mostly credit card companies and their friends in Congress) were happy to proclaim this intent. This has stayed in the public’s mind even though the law didn’t really make it that much harder for most people to file whichever Chapter they wanted.
2. Confusion breeds fear:
If you think it seems silly that a law that went into effect almost six years ago continues to cause such misinformation, keep 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 set of statutory contradictions and ambiguities through the court system is taking a long time.
Some of the more important issues are just now making it to the U.S. Supreme Court. Others won’t be resolved for years. In an environment like this, where the law is not reasonably clear, common sense suggests “erring on the side of caution.” Add a dose of misinformation, and it’s easy to see why many people assume the worst.
3. The new “Means Test” does not apply to many bankruptcy filers:
The “means test,” the main new hoop to jump through to qualify for Chapter 7, has added a lot of complications, but a large percentage of filers are able to avoid it completely. If your annualized income during the six full calendar months before filing the case—counting income from just about every source except social security—is less than the published median family income in your state for your household size, then you qualify for Chapter 7, without needing to apply the “means test.” A large percentage of people filing for bankruptcy have relatively low income, at least for a time, and so they don’t have to deal with 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 enable you to pass the “means test” successfully. The results of the test show that you have no meaningful amount of “disposable income.” And this qualifies you to file a Chapter 7.
5. Chapter 13 may be 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 payment plan. In the relatively few times this happens, usually the amount that must be paidto the Chapter 13 Trustee is much less than the total debt. Plus, Chapter 13 provides advantages over Chapter 7 in many, many situations, so it may be your first choice anyway, regardless of whether you would pass or fail the “means test.”