ARE YOU ELIGIBLE TO FILE BANKRUPTCY?

By Kenneth Lenz, Board Certified Consumer Bankruptcy Attorney
Only by consulting with and engaging a competent bankruptcy attorney can a debtor be assured that he is making the best choices to obtain relief from his debts though bankruptcy.

One of the most difficult concepts for folks to grasp is not everyone is eligible to file a bankruptcy, and selecting the right Chapter in Bankruptcy is critical.    First there is the legal issue of income eligibility.  Second there is the issue of disposable income eligibility.  Third, is the issue of property exemptions.   Next there are required pre-conditions to eligibility for filing bankruptcy, and finally there is the issue of legal disability for filing.  Each will be discussed separately below. 
INCOME ELIGIBILITY:  In 2005 Congress passed and President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act, (“BAPCPA”)  which created a soft barrier to filing Chapter 7 bankruptcy for those consumer debtors whose household income was above the median income for the same size.  This is the so-called Means Test.  Basically all sources of income (except benefits received under the Social Security Act) received in the six calendar months prior to filing must be compared against the median income level (as established by the U.S. Census Bureau) for the same size household in the filing state.  The Means Test does not apply if the debts are primarily business debts, if the debtor is a qualified disabled veteran, and is deferred if a debtor is an active-duty service man deployed outside the USA.  
If the household income is above-median there is a presumption of abuse if the debtor does not file Chapter 13, which alerts the trustee and the United States Trustee to seek to dismiss the Chapter 7 case or to convert the case to a Chapter 13 case.   An experienced bankruptcy attorney may be able to prepare a long-form Means Test to overcome the presumption of abuse when the debtor’s household income is above median, if there are extraordinary expenses or special circumstances.  In other cases, simply waiting to file bankruptcy eliminates the ineligibility.
DISPOSABLE INCOME ELIGILITY:  Disposable income is defined as net income less deduction for all reasonably necessary household expenditures.   It does not include credit card or payments of other debts that will be discharged in bankruptcy.  For most debtors this will be little to none.  However, if the debtor intends to file a Chapter 13 wage earners plan bankruptcy, he must have sufficient income to pay plan payments, or he is not eligible.  If a debtor has substantial disposable income and chooses to file Chapter 7, he may be challenged by the trustee or the U.S. Trustee because his Chapter 7 case is claimed to be an abuse of his obligation of good faith. 
EXEMPTIBLE PROPERTY:  Some debtors who have modest income although technically eligible to file Chapter 7, may not want to file bankruptcy under Chapter 7 because they own property of a value beyond which they can claim exempt, and want to retain the property.  As an example, an established homeowner who has a large amount of equity in their home would be at risk of having the Chapter 7 trustee liquidate the house of they filed under Chapter 7, whereas if the debtor chose to file under Chapter 13 and paid creditors under the plan at least as much as they would receive in Chapter 7, no property would be liquidated.  Of course, if the non-exempt property is not essential, it is the debtor’s choice to file Chapter 7 and allow the trustee to liquidate it.  In certain cases non-exempt property can be sold by a debtor prior to bankruptcy, and the proceeds used in various ways to qualify to be exempt, such as by paying non-dischargeable income tax debt, or making repairs to a vehicle or the home, even by funding a life insurance policy. Consulting with a competent bankruptcy attorney regarding exemption planning is essential.
PRE-CONDITIONS TO FILING BANKRUPTCY:  The Bankruptcy Code requires all individual debtors to complete an approved consumer credit counseling briefing within 180 days of filing.  It also requires that all income tax returns that are due be filed by the filing date or within 30 days thereafter, or the taxing authority may seek to dismiss the bankruptcy case.  No debtor who is a homeowner should consider filing bankruptcy until he/she has an appraisal or broker’s opinion of value in writing.  The home is such a major asset for most debtors, case must be taken before filing to protect the home. 
LEGAL DISABILITY FROM FILING FOR BANKRUPTCY:  There are a few reasons that a debtor could be prevented from filing bankruptcy.  The first is the debtor was already a bankruptcy in a former Chapter 7 bankruptcy case that was filed within eight years, and a discharge was granted.  The second is if the debtor filed a Chapter 13 case that was dismissed with a bar to refiling (usually 180 days).  Another barrier would be if the debtor was not a Citizen of the U.S. or  a permanent resident alien, because it would likely result in the Immigration Service seeking to deport the debtor and his dependents.
CONCLUSION:  There are a number of legal issues which effect a potential bankruptcy filing.  Only by consulting with and engaging a competent bankruptcy attorney can a debtor be assured that he is making the best choices to obtain relief from his debts though bankruptcy.

#