The first question asked by those who contemplate filing bankruptcy is whether they qualify to file bankruptcy. It would be nice if the answer were simple, or if there were a single formula to determine the answer. Unfortunately, due to bankruptcy abuse in the past, Congress has devised several ways in which a bankruptcy case can be challenged and/or dismissed. This article will discuss the issues regarding Chapter 7 filings, which are the most common type.
Because Chapter 7 cases allow a debtor to discharge (eliminate) most or all of their debt, the bankruptcy code has a Means Test designed to determine whether a debtor really needs bankruptcy or whether they have enough income to pay back some or all of their debt (which is what a Chapter 13 case involves). The Means Test is unnecessarily complicated and many issues involving the Means Test have been litigated in bankruptcy courts around the country since its inception in 2005. However, it is a required form in the bankruptcy petition, so debtors must make sure they qualify based on the Means Test.
Even when a debtor’s income and expenses lead to a successful Means Test, there are other reasons a bankruptcy may not work for that debtor. Some of those reasons include:
• Assets that exceed the amount that can be protected in a California bankruptcy;
• Excessive use of credit in the months prior to the bankruptcy filing;
• Large payments to family members in lieu of creditors prior to the filing;
• A new job with a much higher income (which would not show up on the Means Test because the Means Test looks back 6 months);
• When the debts the debtor is trying to eliminate are not of the type that are discharged in bankruptcy.
All of the above issues must be considered prior to filing a Chapter 7 or the debtor runs the risk of challenges to the discharge and/or outright dismissal of the case. And, when a case is dismissed, it still shows on the credit report, but without the benefit of the discharge. It is important to discuss qualifications with an experienced bankruptcy attorney before filing a bankruptcy case.
For more information or a consultation, please call 661-210-5657, or e-mail mjf4bk@ca.rr.com.