Do I qualify for Chapter 7?

This is not a simple “yes” or “no” answer. In 2005, Congress changed the U.S. Bankruptcy Code in order to prevent an abuse of the Chapter 7 provisions for discharging debt. This question now has several parts.

Part 1: Military or nonconsumer debtors: If the debts were incurred while the debtor was on active duty or while the debtor was defending our homeland and the debtor is now disabled, then the debtor can file a chapter 7 without the presumption of abuse. The rest of the parts can be excluded for certain periods of time for those who are actively serving in the military and for a certain period of time after service.

In addition, if the debts are not consumer debts, parts of the form can be skipped.

Part II: Calculation of Income: The question after 2005 was “does the debtor have the means to pay any of his debt?” That question is then broken into two more questions:

Is the debtor above or below median (average) income for their household size in their area?
If above median income, does the debtor have disposable income after deducting a series of monthly expenses from their current monthly income?

Median income is determined by the U.S. Census Bureau. However, the United States Trustee Office (part of the Department of Justice) looks at the U.S. Census Bureau numbers and then adjusts those numbers, releasing new amounts about every six months (typically April and November). Household size is determined by the number of people being supported in the household and children who live/visit between divorced parents can be counted as part of the household. The common term used is to count “heads on beds” in the house. A debtor does not have to claim the additional household member on his tax return each year to be able to count that person as an additional household member. Income is all income (with the exception of Social Security and any funds traceable to the Social Security Act {such as foster care payments, adoption payments}) of the debtor plus any income contributed to the household by other members (for example, if the adult child living in the basement pays a portion of the food bill or the utility bill, whether directly or indirectly paid).

Once the household size is determined, the income is calculated.

Part III – Application: Then, that number is compared to the median income for that household size in that state. If the debtor is under that median income amount for their household size, the debtor is deemed eligible to file a chapter 7.

Part IV: If the debtor is above the median income amount, then the analysis moves on to the second question above — is there disposable income after deductions?
Using the monthly income, there are a series of deductions for expenses. First deducted is a marital adjustment (if the spouse isn’t filing and does NOT contribute a portion of their salary to the household).

Part V: Subpart A – Deductions using IRS standards. Next deducted is series of expenses that the IRS uses when placing tax debtors on budgets to pay back tax debt.

Subpart B – Additional Living Expense Deductions. Next deducted is any health insurance expenses, disability insurance costs, HSA costs, financial assistance paid to elderly or infirm family members, domestic violence prevention costs, home energy costs (above IRS standards), educational expenses for minors, additional food costs (above IRS standards) and continued charitable contributions.

Subpart C – Secured Debt Repayments. Here, a debtor can deduct payments on mortgages or personal property which secures debts. In addition, here, a debtor can deduct child support or alimony payments, attorney fee payments if he were to file a chapter 13, and the chapter 13 administrative expenses.

Part VI: Determination of Abuse Presumption. Using the monthly income and deducting all the parts above, there will be a number created. If the number is less than $124, the presumption of abuse isn’t present and the debtor is eligible for Chapter 7. If the amount is more than $207, the presumption of abuse is present. If the number is between 124 – 207, yet another calculation which compares the unsecured debt multiplied by .025 is done.

Part VII: last chance at being in a Chapter 7. The debtor can claim additional expenses not already calculated or make deductions. For example, the HH income is calculated by looking at the last six months of income. What if the debtor no longer has that income? That would be an item under Part VII.

As you can see, the answer is not an easy answer. Whether or not a debtor qualifies for chapter 7 requires analysis of the situation and completion of a long form with a series of calculations.