Chapter 7 Bankruptcy FAQ

I've heard it's harder to qualify for Chapter 7 bankruptcy now. Is this true?

Congress revamped the bankruptcy laws in 2005, and one of the changes tightened up qualification rules for potential Chapter 7 filers. Under the old rules, the bankruptcy judge could dismiss a Chapter 7 bankruptcy case if the debtor had sufficient disposable income to fund a Chapter 13 bankruptcy repayment plan. (In Chapter 13 bankruptcy, a debtor pays all or a portion of their debts over a length of time -- usually between three and five years.)

The new rules set specific criteria for determining if a debtor would be able to fund a Chapter 13 repayment plan, instead of leaving the decision up to the bankruptcy judge. The rules compare the debtor's income to the median income of a family of the same size in the debtor's state. If the debtor's income is below the median income, the debtor presumptively qualifies for Chapter 7 bankruptcy, although the judge can still require filing under Chapter 13 if the debtor has sufficient income to fund a Chapter 13 plan. If the debtor's income is higher than the median, the rules then look at the debtor's means to determine if, taking into account certain expenses and debt payments, they have enough income to fund a repayment plan. For details on how the means test works, see Nolo's article The Bankruptcy Means Test: Are You Eligible for Chapter 7 Bankruptcy?

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