Have you ever wondered why bankruptcy is referred to as a “chapter?” Even though there are different types of bankruptcy, each one is called a chapter. It sounds a little odd, but there is an easy explanation! Bankruptcy is governed by Title 11 of the United States Code, and each of the four types is addressed in a particular chapter of the Code.
Each chapter is specific to a financial and personal situation. Individuals usually use either Chapter 7 or 13. Chapter 11 is intended for large businesses, and Chapter 12 is only for farms. In this post, we’ll focus on individuals and Chapter 7. As we mentioned last week, a Chapter 7 bankruptcy is designed to give you a fresh financial start by wiping out debt while allowing you to keep as many assets as possible.
In order to file for Chapter 7, you need to show that your income is low. There are two ways to do this:
- Average your last six months of income and if it is equal to or less than the median income for a family of your size in your state, you are eligible for Chapter 7. The official income chart for each state can be found here.
- If your income is higher than the median, there is a test to determine if you really do have enough income to repay some of your debt. The test will subtract some of your necessary expenses, so be prepared with your financial information before you start.
If you don’t pass the means test, you can’t file Chapter 7. The court will find that you should be able to repay some of your debt, and you’ll have to file a Chapter 13 bankruptcy.
There are a few more reasons why you may not be allowed to file for Chapter 7 bankruptcy. The court can decide you will not be allowed to file Chapter 7:
- If you already successfully completed a Chapter 7 bankruptcy within the last eight years or a Chapter 13 bankruptcy within the last six years; or
- If it believes you are committing fraud. Certain actions, such as hiding assets, purchasing high ticket items when you clearly could not afford them or lying about either income or debts, are likely to be interpreted by the court as fraud.
Last, if your case is dismissed because you violated an order from the court, or because your filing was found to be fraudulent or an abuse of the system, you’ll need to wait 180 days before filing again. You can also be required to wait 180 days to re-file if you ask for your case to be dismissed after one of your creditors files a motion for relief from the bankruptcy stay.
Next, we’ll talk about Chapter 13 bankruptcy!
There are government resources that can help you learn more about these topics, but because bankruptcy can be complicated and overwhelming, it’s usually best to consult a lawyer for help. Further information on our Chapter 7 bankruptcy practice can be found here.