The first question asked by many who consider filing bankruptcy is whether they qualify to file. 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 devised several ways in which a bankruptcy can be challenged, and possibly dismissed. This article will focus on the issues regarding Chapter 7 filings, which is the most commonly filed bankruptcy type.
Since 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. If they do not pass the Means Test, a Chapter 13 bankruptcy may be an option (where a payment plan will be required). The Means Test can get complicated depending on the debtor’s situation, and many issues involving the test have been litigated in bankruptcy courts throughout the country with varying results and opinions. However, the test is a required form in a bankruptcy case and a debtor must know whether they qualify for the Chapter they are filing.
When a debtor’s income/expenses leads to a successful Means Test (they qualify for Chapter 7), there may still be other issues to consider before committing to bankruptcy as a solution. Some of those factors include:
• Having assets that exceed the amount that can be protected in a California bankruptcy case;
• Excessive use of credit in the months prior to the bankruptcy filing;
• Large payments to family or friends for past loans;
• A new source of regular income which would allow for a Chapter 13 plan;
• Whether the debts the debtor is trying to remove are of the type that are dischargeable in bankruptcy.
All of the above issues must be considered prior to filing a Chapter 7 bankruptcy case or the debtor runs the risk of challenges to the discharge and/or outright dismissal of the case. It is best to discuss your individual circumstances with an attorney before making a final decision.
For more information or a consultation, please call 661-210-5657, or e-mail mjf4bk@ca.rr.com.