Chapter 7 Bankruptcy is by far the most common type of bankruptcy sought by the average person who is overwhelmed by credit card and other debt. It has the ability to rid many people of their debts and give them a fresh start. A Chapter 7 Bankruptcy will literally wipe out many common debts forever, so that you will never have to repay them and can no longer be harassed by creditors, collections people, attorneys or others trying to get you to pay.
Chapter 7 Benefits
- Quick process (usually only takes 3 – 5 months)
- Wipes out many common debts (credit card, personal loans, car loans, mortgages, and some taxes older than three years). Note with respect to mortgages, the individual cannot eliminate the mortgage commitment, stop making payments and still expect to keep the home.
- Less expensive than some other types of Bankruptcy (attorney’s fees are less and no re-payment of any debts)
Chapter 7 Drawbacks
- Does not provide much help to eliminate mortgages and other secured debts, unless person wants to surrender the collateral (i.e., give up their house or car to the lender)
- Sometimes you have to forfeit certain assets to the Bankruptcy Trustee (although for most people this is extremely rare – See Page What Stuff Do I Get to Keep?)
- It may not be available to people with higher incomes (this is called “Means Testing” and is discussed below)
What is “Means Testing”?
Means testing was started with the 2005 amendments to the Bankruptcy Code. It was a formula designed to provide a more “mechanical” approach to determine who qualified to file bankruptcy under Chapter 7 as opposed to having to file under Chapter 13 and have a repayment plan (effects on Chapter 13 discussed more fully on the Chapter 13 Page). The idea was to provide a more strict, uniform approach. Unfortunately, it has not always worked out that way and many exceptions to its strict use have been carved out. Your bankruptcy attorney will review your income and expenses to determine how you may be affected by the “means test.”
Under “means testing” your Woburn, Massachusetts bankruptcy lawyer looks at your gross household income for the most recent six months. Because we look at the most recent six months, this rule is often used to the benefit of seasonal workers (many labor union jobs, teachers, landscapers, construction workers, etc.), whose higher level of income may not otherwise allow them to qualify to file under Chapter 7. The income your attorney reviews will include:
- Income for both spouses from most sources, even if only one of them is filing for bankruptcy (we don’t count social security and some other less common types of income)
- All regular contributions to household expenses (i.e., room and board received from children or roommates, contributions from other family not living with you, etc.)
Your income is then compared to the Median level of income in your state based upon the number of people in your household. A “household member” does not have to be a relative or a dependent of yours (i.e., roommates count towards the household size). Below is a chart showing the current Median income levels for different household sizes in Massachusetts as of April 1, 2020:
|Over 4 People||+$9,000 per person|
What Does it Mean for Person Who Wants to File a Chapter 7 Bankruptcy?
The short answer is that some people with higher levels of income may not always qualify to file bankruptcy under Chapter 7.
If a person trying to file under Chapter 7 has a household income greater than the median income, there is a presumption that the person would be abusing the bankruptcy system. However, that does not always mean that the person cannot file under Chapter 7. In order to show that there is no abuse, as your bankruptcy attorney we would review your expenses, and using certain allowed expenses, show the court that you qualify to file under Chapter 7. This is considered on a case by case basis. However, if after taking into account those expenses, your left over income (also called disposable income) is still too high, then you may have no other choice but to file bankruptcy under Chapter 13 or some other Chapter.
Exceptions to Means Testing
As with most rules there are exceptions. Some of these exceptions are discussed here. Means Testing will not apply if:
- Your debts are not primarily “consumer debts,” which is defined as “debt incurred by an individual primarily for a personal, family, or household purpose
- You are a disabled veteran and your debts arose primarily during the time during which you were on active duty or performing a homeland defense activity
- You are active duty military or performing a homeland defense activity (including National Guard called to active duty) and within 540 days of your no longer being on active duty or performing a homeland defense activity