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Friday, August 16, 2019

Who is Eligible for Chapter 7 Bankruptcy?

There are multiple “chapters” of bankruptcy, such as Chapter 7 and Chapter 13, but what does it all mean? The chapter simply refers to which chapter in the bankruptcy code is being relied upon in the petition for bankruptcy. Each chapter has different requirements, costs, and consequences, and each should be reviewed extensively before deciding for which to file. This post will focus on Chapter 7 bankruptcy and who is eligible to file.

Chapter 7 bankruptcy is a liquidation event. This means that when a Chapter 7 bankruptcy petition is filed, the goal is to liquidate assets and pay whatever debts are possible. The unpaid debts will be discharged, which means that they are wiped out and no longer owed. When paying back debts, secured debts are paid back first. Secured debts are debts with pledged assets as collateral, such as a mortgage on a property. Next, non-dischargeable debts are paid back, such as child support, payroll taxes, and certain court judgments. Finally, if any money remains, unsecured creditors will be repaid. Unsecured creditors include credit card companies and other creditors who have extended credit without collateral. Regardless of whether the non-dischargeable debt is satisfied, it is not discharged following a Chapter 7 bankruptcy. However, any outstanding secured or unsecured debts are discharged upon completion of a Chapter 7 bankruptcy.

Given that debts are discharged under Chapter 7 bankruptcy, the eligibility requirements are stringent. To ensure that Chapter 7 bankruptcy is not taken advantage of, a two-part means test was created to determine whether the individual is actually in need of Chapter 7 bankruptcy. The means test first considers whether the petitioner’s household income over the past six months is greater than the state’s median income for a similarly situated household. For example, if you are married with one child and a household income of $50,000 while the state median income for a similar household is $65,000, then you’ve passed the first part of the Chapter 7 bankruptcy means test. If your household income is less than the state median income, you qualify for Chapter 7 bankruptcy. If your income is greater than the state median, then there is a second test for eligibility.

Second, the means test considers disposable income. To determine whether your disposable income is low enough, you first need to determine your expenses for the past six months. This is a rather meticulous undertaking that involves gathering receipts or proof of purchase for all “allowable expenses” such as rent, groceries, clothing, and medical expenses. The allowable expenses are then deducted from your income to determine your disposable income. You may qualify for Chapter 7 bankruptcy if your disposable income is low enough for your state. Each state has different limitations on disposable income.

Although filing Chapter 7 bankruptcy can be a complex and challenging endeavor, it will offer you a fresh start, provided that you have proper legal representation.


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Serving Southeastern Wisconsin, with offices in Milwaukee and West Bend, Affliated Attorneys, LLC represent clients throughout Milwaukee County, Washington County, Waukesha County, Dodge County, Ozaukee County, Racine County, Sheboygan County, Jefferson County, Fond du Lac County and Walworth County.



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