Deciding to file Chapter 7 bankruptcy should involve a review of everything that is required to successfully get a bankruptcy discharge after the bankruptcy filing. What follows is an overview of the requirements to file Chapter 7 bankruptcy and the requirements to getting your Chapter 7 discharge.
Written by Attorney Andrea Wimmer.
Updated August 7, 2020
Individuals, spouses, and business entities can qualify for relief under Chapter 7 of the Bankruptcy Code. There is a little bit more to it than that, however. Everyone seeking debt relief in the form of a bankruptcy dischargeunder Chapter 7 must meet certain requirements. Some requirements determine whether you are eligible to file Chapter 7 in the first place. Other requirements determine whether you’re eligible to receive a bankruptcy discharge in a Chapter 7 bankruptcy. Since getting your discharge is your primary goal in filing Chapter 7, your first step when deciding to file is learning more about what these requirements are. What follows is an overview of the requirements to file Chapter 7 bankruptcy and the requirements to getting your Chapter 7 discharge.
Chapter 7 Bankruptcy Requirements for Filing
As discussed above, individuals, spouses, and business entities can file bankruptcy under Chapter 7. Business entities include partnerships, corporations, and limited liability companies. Whether it's a person or a business of some kind, no one can be a debtor in bankruptcy if a prior case by the same filer was dismissed (or thrown out) because the filer did not obey a court order in the 180 days before the new case was filed. The same is true if the filer voluntarily withdrew the last case after a creditor asked for relief from the automatic stay. The goal of this rule is to prevent people from taking advantage of the system by filing a number of bankruptcy cases in a row only to delay their creditors. Sometimes folks try to do this with the simple goal of postponing a foreclosure over and over again. Bankruptcy proceedings give the honest but unfortunate debtor the opportunity to get a fresh start; it's not a way to simply frustrate creditors without seeing it through to the end.
Another way someone’s prior bankruptcy case can impact their ability to file a Chapter 7 bankruptcy is if not enough time has passed between the cases. That's because there is a limit to how often a person can seek bankruptcy relief. Once someone has filed Chapter 7 bankruptcy and received a discharge, they can't petition the Court for another Chapter 7 discharge for at least 8 years. If the prior case was a Chapter 13 bankruptcy, then a Chapter 7 filing is possible 6 years after that case was filed, assuming the Chapter 13 case did not pay off all debts in full.
Credit Counseling Course
Individuals must complete a credit counseling course in the 180 days before filing their case or they're not eligible to be a debtor in bankruptcy. It's important that the credit counseling course is taken through a provider that has been approved by the United States Trustee for the district the case is filed in. There are usually a number of companies offering the course in any given district with most of them offering the course online or by phone. Some providers also offer the course in person, which gives you the opportunity to interact with a credit counselor face-to-face. Completing the course typically takes about 90 minutes and the price varies between $10 - $50, depending on the credit counseling course provider. The purpose of the course is to make sure that everyone knows the different types of bankruptcy proceedings they can choose and know about debt relief options outside of the Bankruptcy Court. After the course, and a brief chat with a credit counselor, a certificate of completion is issued. This certificate has to be filed with the bankruptcy petitionso the Court knows that the requirement has been satisfied.
Everyone filing Chapter 7 bankruptcy has to pay a $335 filing fee to the Bankruptcy Court. The filing fee is typically due when you first go to the courthouse to file bankruptcy. If you’re subject to a wage garnishment, making it difficult to save up the full fee, you can ask the Court tomake payments instead. That way you can file bankruptcy, triggering the protections of the automatic stay and end the garnishment. This, in turn, should free up enough money for you to pay the court filing fee. People who earn less than 150% of the federal poverty guidelines can ask the Court to waive the filing fee.
In 2005, the United States government made significant changes to the bankruptcy laws to make sure that only those who truly need it are able to get a bankruptcy discharge under Chapter 7. This eligibility test is called the Means Test because it checks whether the filer has the “means” - or enough income - to pay at least some of their debts as part of a repayment plan under Chapter 13. Passing the Means Test tells the Court that your income is not enough to fund a Chapter 13 repayment plan and that you’re eligible to file a Chapter 7. It’s broken into several parts.
Calculate Current Monthly Income and Annual Income
In the first part of the Means Test, you compare your household income, calculated based on the last six months (not including the month you’re filing in) with the median household income for a household of your size. Your annual income is based on your monthly income from all eligible sources during the six months before filing the bankruptcy petition. So, someone filing bankruptcy in July will have to calculate their income based on how much money they made from January through June.
Examples of eligible monthly income include:
Wages, tips, salaries, bonuses, commissions, and overtime
Alimony and child support
Gross income from operation of a business
Dividends, interest, and royalties
State disability payments
Examples of monthly income that is not included in the Means Test are:
Social security benefits of any kind
Veterans’ disability benefits (based on the recently passed HAVEN Act)
Victim benefits to victims of war crimes, domestic terrorism, and international terrorism
Tax refunds, one time gifts from a family member or friend, proceeds from yard sales or other personal property if you’re not in the business of sales
To calculate your annual income, add together all eligible income in the six month period and divide the total by six. Multiply the result by 12 to determine your average annual income for purposes of the Means Test.
Compare Your Average Annual Income to the State Median Income
The median income numbersvary from state to state, and are updated periodically, so it’s important to complete this analysis around the time you plan on filing your case. If your gross income (before taxes or other deductions come out) is less than the median income for your state, you pass the Means Test and may file Chapter 7 bankruptcy. If your annual income exceeds the median income for your state, you fail the test, but don’t worry! There is a second section of the Means Test that many people pass to satisfy the income limits for Chapter 7 bankruptcy.
Calculating Disposable Income
If your income is higher than the state median income, then the extended Means Test analysis has to be completed to determine whether you qualify for Chapter 7 relief. In this step, you are able to subtract not only your paycheck deductions, but also reasonable and necessary living expenses, as laid out in the Bankruptcy Code. The result is called your disposable income, which is the amount you can afford to pay towards your debts each month. If the number is negative, you have no disposable income and pass the Means Test. If you have disposable income, then your ability to file Chapter 7 bankruptcy depends on how much disposable income you have. If it’s enough to pay 25% of your unsecured debts over 60 months, then you’re not eligible for relief under Chapter 7. In that case, in order to get the protections available under the bankruptcy laws, you’ll have to file Chapter 13 bankruptcy instead.
A lot of people who fail part one of the Means Test qualify under the disposable income test and are able to file a Chapter 7 bankruptcy. If you fail the Means Test, keep in mind that you’re better off than half the people in your state and don’t get caught up in your inability to file Chapter 7. A bankruptcy filing under Chapter 13 can help you lower the interest rate on your car loan, which may result in a lower monthly car payment than you have now. That, combined with the discharge you receive at the end of your payment plan, may make a bankruptcy filing under Chapter 13 an immediate win for you regardless!
Exceptions to the Income Requirements based on type of debt
There are some circumstances in which the Means Test does not apply and the filers income is not reviewed by the Court or the Office of the United State Trustee.
If more than 50% of your debts are nonconsumer debts, you don’t have to pass the means test to file Chapter 7. Nonconsumer debts are loans and credit card debt taken out for a business purpose. Medical bills, your home mortgage and your personal credit card debt are considered consumer debts. Personal loans, credit card debt, and other unsecured debt you incurred to benefit your business and not your personal or family finances are nonconsumer debts. If you think you might qualify for this exception to the Means Test, your best bet will be to talk to a local law firm to make sure this exception applies to your case. The analysis can be very fact intensive and having a bankruptcy lawyer guide you through it will be invaluable.
Debts incurred while on active duty
Disabled veterans who incurred their debts mostly while they were on active duty or performing a homeland defense activity are also excluded from the Means Test.
Statement of Exemption
A filer who is exempt based on the kind of debt they have, is required to file a Statement of Exemption to the Means Test. This is a simple form that lets the Court and the United States Trustee’s Office know why you are not subject to the income limits.
Chapter 7 Bankruptcy Requirements for Discharge
Debtor Education Course
Another important bankruptcy requirement is that you complete a second bankruptcy course - the debtor education course - before receiving your bankruptcy discharge. You can’t complete the debtor education course until after your bankruptcy petition is filed. If you don’t complete your debtor education course and file your certificate of completion with the Court, you won’t receive your bankruptcy discharge. Obtaining a bankruptcy discharge is the ultimate goal of filing a Chapter 7 bankruptcy case, so as far as bankruptcy requirements go, completing your debtor education course must be one of your top concerns. Because this is so important, it’s best if you complete the course as soon after you receive your case number as possible, so you can’t forget later.
The bankruptcy requirements include this course to help filers learn more about budgets, saving money, and using credit wisely. The debtor education course is generally available from the same company you used to complete your credit counseling course, though you don’t have to go through them. You can choose any one of the providers approved by the U.S. Trustee’s office for your district. The course is available online and can be completed in about two hours. The cost of the debtor course is comparable to the cost for the pre-filing credit counseling course. Upsolve can provide additional information about low-cost bankruptcy courses to help you meet these bankruptcy requirements.
Official Bankruptcy Forms
You are required to use the official bankruptcy forms available from the United States Bankruptcy Court. Some websites claim to have the official bankruptcy forms, but it’s best to use the forms provided by the Court. If you choose to use Upsolve to assist you with filing your Chapter 7 case, we provide the official bankruptcy forms for you to file. You don’t need to worry about whether you will meet the bankruptcy requirements for forms when you use our system to complete the forms.
Cooperation in Case Administration
This is one of the vaguest requirements, but arguably one of the most important. In addition to checking all of the boxes (taking counseling, paying the filing fee, using the correct forms, taking the required credit counseling courses) you have to help yourbankruptcy Trustee in the administration of your case. One part of that is attending your meeting of creditors. But there is more to it. Since Chapter 7 bankruptcy is a liquidation bankruptcy, the Trustee reviews your assets, both real estate and personal property, to find out whether you have any nonexempt property. Even though everything you own is an asset, not every case is a so-called “asset case.” In an asset case, the bankruptcy Trustee sells nonexempt assets and uses the money to pay creditors. You will not receive your discharge if you don’t cooperate with your bankruptcy Trustee in this process. Additionally, even after your discharge has been entered, the Trustee can ask the Court to revoke it if you’re not living up to your obligations. This obligation to cooperate with the bankruptcy Trustee can take many forms depending on the specific circumstances of the case. The most important thing you can do to make sure you meet this requirement is updating your bankruptcy Trustee (and the Court) if your contact information, especially your mailing address, changes after your case is filed. Also, make sure to immediately open and carefully review any mail you may get from your bankruptcy Trustee and don’t hesitate to call their office if you have questions about it afterwards. If you stick you head in the sand and stop communicating with your Trustee, they can’t help but assume the worst.
Why Do I Want a Bankruptcy Discharge?
Your bankruptcy discharge eliminates your legal obligation to repay a discharged debt. In other words, creditors who debts are discharged in Chapter 7 can’t take any collection action against you. Not all types of debt are dischargeable. Things like student loans and recent tax debts can’t be discharged and you’ll continue to be obligated to pay them. Make sure you stay current with these obligations, as they’ll help you rebuild your credit score by reporting favorably on your credit report.
If you don’t receive your bankruptcy discharge because you did not meet all of the requirements after filing your case, you continue to owe all the debts you had before filing bankruptcy. For your creditors, it will be as if you have never filed for Chapter 7 debt relief and once your case is closed without a discharge, the collection actions can start all over again.
Let Upsolve Help You File a Chapter 7 Bankruptcy Case
Are you ready to get rid of your debt? If so, Upsolve is here to help you. We are a non-profit organization that assists low-income households obtain debt relief through Chapter 7 bankruptcy. For free. Some individuals can afford to hire a bankruptcy attorney to help them with their case and sometimes it makes sense to do so. In fact, if you’re worried about losing property, or have some complication your financial situation, hiring a lawyer can be a good investment. However, we understand that many people don’t have the money to hire an attorney. We are committed to helping those who can’t afford to hire an attorney file a Chapter 7 case without one ("pro se"). If you want help, see if you qualify to file bankruptcy for free using Upsolve and make sure to keep reading the various resources available for free online as you decide the best course of action for you.