Chapter 7 Bankruptcy—Who Can't File?

If you're wondering if you qualify for Chapter 7 bankruptcy, the answer will depend on whether you meet all Chapter 7 qualifications. For instance, almost all filers must have earnings low enough to pass the "means test" before receiving a discharge order wiping out qualifying debt.

Also, if you've filed for bankruptcy previously, you must wait before filing again. Keep reading to learn about the requirements for Chapter 7 bankruptcy, what disqualifies you from filing Chapter 7, and more.

Almost Anyone Can File Chapter 7 Without Debt Relief

Individuals and businesses can almost always use Chapter 7 to sell property for the benefit of creditors. But that's not what most people want. They want to know whether they qualify for a Chapter 7 discharge—the court order that wipes out credit card balances, medical bills, personal loans, and more.

However, not everyone qualifies for a Chapter 7 debt discharge. For example:

• Businesses don't qualify for debt discharges (except sole proprietors). Companies use Chapter 7 to liquidate property and pay creditors—that's it.
• Individuals must meet various qualifications before being entitled to a Chapter 7 discharge. Otherwise, they'll also be limited to selling property for the benefit of creditors.

Because bankruptcy works differently for businesses and individuals, if you're considering placing a company in Chapter 7, skip to the end of the article. That's where you'll learn about small businesses in Chapter 7 bankruptcy. If you're an individual interested in Chapter 7, keep reading.

What Disqualifies You From Filing Chapter 7 and Receiving a Dischage?

Individuals must overcome several stumbling blocks before qualifying for a Chapter 7 discharge. Below are the primary hurdles you'll face and how to overcome them.

High-Earning Individuals Can't File for Chapter 7

Individuals whose income exceeds Chapter 7 limits won't qualify for a discharge. Because they have available income to repay some amount to creditors, they must pay into a three- to five-year Chapter 13 repayment plan for debt relief. Here's how to determine if your income qualifies for Chapter 7 or if you'll be limited to Chapter 13.

How High Is Your Income?

The means test calculates whether you have enough income to pay creditors through a Chapter 13 plan.

The first step measures your income against the median income in your state. After averaging your gross income over the six months before filing, you'll divide the total by six and multiply by twelve.

If your income is less than or equal to the median, the law presumes you're eligible for a Chapter 7 discharge. If your income exceeds the median, you'll be eligible if you pass the second part of the means test.

You'll find the state median figures on the U.S. Trustee Program website.

Do You Have Money Remaining Each Month?

Just because you passed the means test doesn't mean you've overcome all financial hurdles. The means test isn't the only paperwork the trustee will review to determine Chapter 7 eligibility.

Because the means test looks backward, the trustee will examine bankruptcy schedules disclosing your current income and monthly budget. If the schedules show you can afford to repay a portion of your debts, the trustee will ask the court to convert your matter to Chapter 13.

Example. Shana worked as a barista for five of six months before filing for Chapter 7. She easily passed the means test with an average monthly income of $2,000. However, she landed her dream job a month before filing and received a substantial income boost. Her bankruptcy schedules showed a current monthly income of $4,000 and expenses of $1,950 (she hadn't had time to upgrade her apartment). The trustee filed a motion asking to convert the case from Chapter 7 to Chapter 13 because of Shana's ability to repay creditors.

Other Chapter 7 Bankruptcy Requirements That Could Disqualify You

You might not qualify for a discharge if one of the following situations applies.

You Previously Filed and Received a Bankruptcy Discharge

You can't get another Chapter 7 discharge if you obtained a Chapter 7 discharge within the last eight years. You must wait six years if you previously filed for Chapter 7 and want to file for Chapter 13.

It's important to note that you can still file for Chapter 7 or 13 even if you aren't entitled to a discharge. For instance, it's common to use Chapter 13 to force creditors into a lengthy payment plan. This can be an invaluable way to prevent wage garnishment, bank levies, and property seizure when you're lacking other options.

Also, keep in mind that this assumes you received a discharge in the previous case. The court might have dismissed your case before granting a discharge. If so, and no wrongdoing was involved—perhaps you forgot to file paperwork or couldn't attend the creditors meeting—you'll likely be entitled to a discharge if you file again.

Example. Lucy owed $50,000 in tax arrearages that she couldn't discharge in the Chapter 7 case she filed last year. She also incurred $1,000 in new credit card debt. Because she was at risk of a wage garnishment or, worse yet, losing her home, she filed for Chapter 13 even though sufficient time hadn't passed to allow her to receive a debt discharge. Lucy was content paying the arrearages and credit card debt through Chapter 13 without fear of collection activity.

Learn more about multiple bankruptcy filings and when you qualify for a second bankruptcy discharge.

The Court Dismissed a Bankruptcy Within the Previous 180 Days

You can't file for Chapter 7 bankruptcy if you or the court dismissed a previous Chapter 7 or Chapter 13 case within the past 180 days because of one of the following reasons:

• you violated a court order
• the court ruled that your filing was fraudulent or constituted an abuse of the bankruptcy system, or
• you requested the dismissal after a creditor asked for relief from the automatic stay.

Learn why you'll lose the automatic stay after repeat bankruptcy filings.

You Defrauded Creditors

A bankruptcy court will dismiss a case if it thinks you tried to cheat your creditors or that you've concealed assets so you can keep them for yourself rather than have them sold to pay your debt. When this happens, you might be precluded from refiling in the future.

Some activities are red flags to the court and trustee and you can expect the trustee to scrutinize closely:

• selling assets to your friends or relatives for less than the fair market value
• running up debts for luxury items when you didn't have a way to pay them off
• concealing property or money from a business partner, or
• lying about your income or debts on a credit application.

Also, you must sign your bankruptcy papers under "penalty of perjury" and declare that everything in them is true. If you deliberately fail to disclose property, omit material information about your financial affairs, or use a false Social Security number to impersonate another person and the court discovers your action, the court might dismiss your case or refer your matter for fraud prosecution.

For more information, see What Is Bankruptcy Fraud?

Corporations and LLCs Don't Qualify for a Chapter 7 Discharge

Businesses can file for bankruptcy, but it doesn't always make sense. Chapter 7 bankruptcy won't wipe out the debt of a corporation or LLC. Instead, the trustee will liquidate the company assets and distribute the funds to creditors.

But a closed business doesn't truly need a discharge. In most cases, the owner wants to discharge personal guarantees the owner signed agreeing to pay the business debt personally. Here's how this would play out in a typical bankruptcy case.

Example. Henry's Doughnut Emporium failed to flourish after customers realized the eye-catching pastries tasted like cardboard. Even though the business is an LLC, Henry agreed to be personally responsible for the business's debt. A business bankruptcy lawyer explained that if the LLC files for Chapter 7, the trustee will sell the doughnut-making equipment and use the money to pay creditors. However, bankruptcy won't erase the business debt, and Henry will remain responsible for the balance. Henry leaves the attorney's office with a difficult decision to make.

Put Doughnut Emporium in Chapter 7. This option would make sense if it would reduce the business debt to what Henry could afford. However, Henry will want to consider whether he could sell the equipment for more than the trustee would receive at a fire sale.

File Chapter 7 personally. If Henry meets Chapter 7 discharge requirements, he could eliminate his personal and business debt responsibilities in a single Chapter 7 filing. However, this strategy would be viable only if any property lost to the trustee was worth less than the debt discharged.

Put Doughnut Emporium in Chapter 7 and file individually. This highly transparent approach would be unnecessary unless Henry was concerned a creditor might claim he was hiding business assets.

Learn about when you're responsible for business debts and Chapter 7 bankruptcy for LLCs and corporations.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we want to ensure you find what you need. Below, you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.