Chapter 7 Bankruptcy—Who Can't File?

Almost any person or company that owns property in the United States, or who has a permanent residence or business here, can file for Chapter 7 bankruptcy. However, you must meet several criteria before you're eligible for a discharge—the order that wipes out qualifying debt.

For instance, if you're an individual filing a consumer bankruptcy, your income must pass the "means test" (unless you're a qualified disabled veteran or your debts come primarily from the operation of a business). Also, the court will dismiss your case if you filed a previous bankruptcy within a certain period, or if the court believes you're cheating creditors. And, you must be a natural person—an incorporated entity isn't entitled to a debt discharge in Chapter 7.

You Have Enough Income to Repay Your Debts

In bankruptcy, clear rules dictate who can receive a discharge in Chapter 7 bankruptcy—and who will be forced to pay into a three- to five-year Chapter 13 repayment plan. Here are a few requirements you'll have to meet.

How High Is Your Income?

The first step in figuring out whether you can file for Chapter 7 bankruptcy is to measure your "current monthly income" against the median income for a family of your size in your state. Your "current monthly income" is your average income over the last six months before you file.

If your income is less than or equal to the median, the law presumes that you are eligible for Chapter 7 bankruptcy (assuming you meet the other Chapter 7 eligibility criteria listed below). If your income is more than the median, however, you must pass "the means test" to file for Chapter 7 bankruptcy.

Do You Have Enough Disposable Income to Repay Some Debts?

The means test determines whether you have enough disposable income—the amount of your paycheck that remains each month after subtracting certain allowed expenses and required debt payments—to repay at least a portion of your unsecured debts over a five-year repayment period. Unsecured debts are those obligations that aren't backed by collateral, such as credit card balances, personal loans, and medical bills.

Learn more by reading The Bankruptcy Means Test: Are You Eligible for Chapter 7 Bankruptcy?

Do You Have Money Left Over Each Month?

The means test isn't the only paperwork the trustee will review to determine whether you can repay creditors. Unlike the means test, your bankruptcy schedules provide a snapshot of your current income and actual expenditures.

The trustee will look at Schedule I: Your Income and Schedule J: Your Expenses. If the net amount shows that you have enough left over each month to make a meaningful monthly payment to creditors, the trustee will recommend that the court convert your matter to Chapter 13.

For more information on these requirements, including detailed worksheets that will help you figure out whether you can use Chapter 7 bankruptcy, see How to File for Chapter 7 Bankruptcy, by attorney Cara O'Neill and Albin Renauer, J.D.

Get step-by-step instructions on filing Chapter 7 bankruptcy in Nolo's How to File for Chapter 7 Bankruptcy.

You Previously Received a Bankruptcy Discharge

You can't get another Chapter 7 bankruptcy discharge if you obtained a discharge of your debts in a Chapter 7 bankruptcy case within the last eight years, or a Chapter 13 case within the previous six years.

Learn more about when you can file for bankruptcy again.

The Court Dismissed Your Bankruptcy Within the Previous 180 Days

You can't file for Chapter 7 bankruptcy if a previous Chapter 7 or Chapter 13 case was dismissed 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.

You Defrauded Your Creditors

A bankruptcy court might dismiss your 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.

Some activities are red flags to the court and trustee. If you've engaged in any of them during the past year, the court might dismiss your bankruptcy case (or worse). Here are a few actions that 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 hide your identity as a prior filer), 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?

The Filer Is a Corporation or LLC

A business can file for bankruptcy—and sometimes it makes sense to do so (but not usually). Chapter 7 bankruptcy won't wipe out the debt of a corporation or LLC, however. Instead, the trustee will liquidate the company assets and distribute the funds to creditors.

You can find out more by reading Chapter 7 Bankruptcy for LLCs and Corporations.

More on Chapter 7 Bankruptcy

For detailed information on all aspects of filing a consumer Chapter 7 bankruptcy, see How to File for Chapter 7 Bankruptcy, by Attorney Cara O'Neill and Albin Renauer, J.D.