Not everyone who is in a serious debt situation will qualify for relief through Chapter 7 bankruptcy. Eligibility for this type of bankruptcy filing is determined via a two-step test.
According to the United States courts, a debtor is eligible for filing Chapter 7 bankruptcy if he or she has a current income per month that is at or below the median for the state. If the person's income is above that level, then the courts will use a further means test to determine if the person is eligible.
The means test looks at monthly income over a five-year time period. The income is reduced by allowed expenses, and if the remaining amount is over $12,475, the person is likely not eligible for Chapter 7 bankruptcy. The same is true if the remaining income is equal to 25 percent or more of the person's nonpriority, unsecured debt.
The other requirement for a Chapter 7 filing is that the entity filing is a person or an allowed business entity such as a corporation or partnership. If a person doesn't quality for a Chapter 7 bankruptcy because of income level, he or she is usually able to file for a Chapter 13 bankruptcy. In fact, the court might automatically shift a Chapter 7 filing to a Chapter 13 filing if the means test is failed.
Understanding your eligibility for various types of filings helps you plan for your bankruptcy. Proper bankruptcy planning and legal assistance helps you get the best possible outcome from your decision. With the right bankruptcy choices, you can clear some of your financial backlog and move into the future with a better chance at success.
Source: United States Courts, "Chapter 7 - Bankruptcy Basics," accessed Nov. 18, 2015