At Financial Freedom Advocates, we believe firmly that bankruptcy can be a valuable tool to rebuild a person’s finances. Although bankruptcy may be viewed a certain way throughout society, the truth is that most bankruptcies are about honest mistakes and miscalculations, as opposed to fiscal irresponsibility. On our blog, we’ve spent quite a bit of time discussing the benefits of bankruptcy, and also different technical aspects of the bankruptcy process. Today, we will continue in this tradition and answer the title question: is there a minimum debt requirement to file Chapter 7 bankruptcy?
Eligibility Issues: Income & Past Filings
Let’s first start by addressing basic eligibility issues of Chapter 7 bankruptcy. The primary step in determining eligibility is your current monthly income. You need to examine your current monthly income and then measure that against the median income for your household size in your state. Different states have different average income levels – and different living costs – and so this fact is accounted for in the bankruptcy eligibility requirements. Importantly, your current monthly income needs to be averaged over the past 6 months, and so your “current income” actually represents an average over a 6 month period.
If your income is either equal to the median income for your demographic, or below that median, then there is a presumption that you will be eligible to file. However, if your income is above the median, then you will need to satisfy the so-called “means test,” which is basically a method to filter those who can file Chapter 7 versus those who must develop a repayment plan.
The means test will determine how much disposable income you have left each month after paying all necessary expenses. In this context, “necessary expenses” equates to required debt payments, and also certain permitted expenses (i.e. rent, groceries, etc.). If you fail the means test, you won’t be eligible to discharge everything in Chapter 7, because you will be required to develop a repayment plan.
Another main eligibility issue has to do with past filings. If you already successfully discharged debts in Chapter 7 bankruptcy, then you won’t be able to file again until 8 years have passed. What’s more, if you filed for Chapter 7 bankruptcy and your case was dismissed within the past 180 days for one of three different reasons, then you won’t be able to file for bankruptcy. The three reasons are: (1) a court order was violated, (2) the court found evidence of fraud or abuse of the bankruptcy system, and (3) a creditor asked for dismissal in order to obtain relief from the automatic stay.
The Natural Person Requirement for Chapter 7
Another requirement for Chapter 7 bankruptcy is that the filer must be a natural person; Chapter 7 is not available for a corporate entity; only individuals can file (however, some small businesses – such as mom and pop’s stores, may qualify).
Does Chapter 7 Have a Minimum Debt Requirement?
The simplest answer is “no,” there is no minimum debt requirement in order to file for Chapter 7 bankruptcy. In other words, a person doesn’t need to have a specific amount of debt in order to file. Of course, if a person lacks a certain amount of debt, he or she may be eligible to file, but many people might comment on the desirability or wisdom of filing. Chapter 7 bankruptcy may not make the best financial sense unless a person has accumulated a certain amount of debt. We can help counsel readers on understanding what this amount might be in a given situation.
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