Will I Quality for a Chapter 7 Bankruptcy?

After receiving her undergraduate degree and law degree from Western State University, Catherine Christiansen went onto become an attorney focusing on bankruptcy law. She now helms the Christiansen Law Office in Long Beach, California, and works with clients on many types of debt reduction techniques. To better explain what a Chapter 7 bankruptcy is, she tells us about the benefits and the drawbacks of such a filing.

A Chapter 7 bankruptcy is known as a liquidating bankruptcy. What makes it a little tricky though, is that you have to qualify for it based on a number of eligibility requirements.

There are three parts of a test to determine if you qualify for a Chapter 7 bankruptcy filing:

1) First, to qualify for a Chapter 7 bankruptcy, your income has to be at or below a certain pre-determined level.

2) Second, to qualify for a Chapter 7 you must add up all of your unsecured debts on the property you are hoping to keep and subtract that number from your monthly income. You must then subtract allowable expenses such as taxes and medical costs from that income. And in order to be allowed to file for Chapter 7, you cannot have any money leftover for disposable expenses after subtracting those allowable costs.

3) Finally, the third part of the test involves analyzing your personal finances for this current month. No other period will necessarily have to be examined, just the current month when you are filing. And based on that analysis, it will be determined how much disposable income you have.

Based on the analysis that was done in the third part of the test, you will take the one-month income that it was determined that you have and multiply it by 60 (which is the number of months in a five-year repayment plan). If you are unable to take 25% of that income and pay your unsecured creditors, then you will not qualify for a Chapter 7 bankruptcy.

Qualifying for a Chapter 7 bankruptcy can be a long and arduous process. However, once you are qualified, you will be forgiven of all of your unsecured non-priority debts. Unsecured non-priority debts, meanwhile, include things such as credit cards, personal loans, and medical bills — all things that the state cannot repossess or take back. Things that the state can take back would be considered secured debts. If someone’s main issue is being behind on a mortgage payment — which is tied to a home, and therefore is a secured debt — then a Chapter 7 bankruptcy might not be the best remedy for their problem. The reason for this because with a Chapter 7, the creditor has the right to ask the court for a release to go ahead with the foreclosure process if the debtor is not able to stay current on his secured debt payments. If there is no equity in the property, and if the debtor is not going to being organized during his bankruptcy, then the house can be taken.

Chapter 7 bankruptcy is a tricky process. That’s why I tell people that sometimes filing for Chapter 7 is a good thing for their situation, and sometimes it is not.

This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.