Your Chapter 7 Bankruptcy Companion

1. Should You File for Chapter 7 Bankruptcy?

• Bankruptcy in America: The Big Picture
• An Overview of Chapter 7 Bankruptcy
• Who Cannot File for Chapter 7
• Does Chapter 7 Bankruptcy Make Economic Sense?
• Alternatives to Chapter 7 Bankruptcy

2. The Automatic Stay

• Actions Prohibited by the Stay
• When the Stay Doesn’t Apply
• Evictions

3. Your Property and Bankruptcy

• Property in Your Bankruptcy Estate
• Property That Isn’t in Your Bankruptcy Estate
• Property You Can Keep (The Exemption System)
• Selling Nonexempt Property Before You File
• Avoiding Property Transfer Issues Before Bankruptcy

4. Your House

• How Bankruptcy Affects a Typical Homeowner
• If You’re Behind on Your Mortgage Payments
• Will You Lose Your Home?

5. Secured Debts

• What Are Secured Debts?
• What Happens to Secured Debts When You File for Bankruptcy
• Options for Handling Secured Debts in Chapter 7 Bankruptcy
• Choosing the Best Options
• Step-by-Step Instructions

6. Complete and File Your Bankruptcy Paperwork

• Gather the Necessary Documents
• Get Some Information From the Court
• For Married Filers
• Required Forms and Documents
• Voluntary Petition for Individuals Filing for Bankruptcy (Form 101)
• Relating to Eviction Judgments (Forms 101A and 101B)
• Form 106 Schedules
• Statement of Financial Affairs for Individuals Filing for Bankruptcy (Form 107)
• Statement of Intention for Individuals Filing Under Chapter 7 (Form 108)
• Your Statement About Your Social Security Numbers (Form 121)
• The Means Test Forms
• Notice Required by 11 U.S.C. § 342(b) for Individuals Filing for Bankruptcy (Form 2010)
• Creditor Mailing List
• How to File Your Papers
• After You File

7. Handling Your Case in Court

• Routine Bankruptcy Procedures
• Amending Your Bankruptcy Papers
• Filing a Change of Address
• Special Problems

8. Life After Bankruptcy

• Newly Acquired or Discovered Property
• Newly Discovered Creditors
• Postbankruptcy Attempts to Collect Debts
• Attempts to Collect Discharged Debts
• Attempts to Revoke Your Discharge
• Postbankruptcy Discrimination
• Rebuilding Credit

9. Which Debts Are Discharged

• Debts That Will Be Discharged in Bankruptcy
• Debts That Survive Chapter 7 Bankruptcy
• Disputes Over Dischargeability

10. Help Beyond the Book

• Debt Relief Agencies
• Bankruptcy Petition Preparers
• Legal Research

Glossary

Appendix

• How to Use the Downloadable Forms on the Nolo Website
• List of Forms Available on the Nolo Website

Index

Chapter 1
Should You File for Chapter 7 Bankruptcy?

Your first objective is determining whether you can—and should— file for Chapter 7 bankruptcy. This chapter will give you an overview of the bankruptcy process and help you decide whether

Chapter 7 bankruptcy is right for you. In the chapters that follow, we explain what will happen to your debts and property and how to complete the required bankruptcy paperwork. And, of course, we also make sure that you know what to expect once your bankruptcy is final.

Bankruptcy in America: The Big Picture

Although you might not care much about the larger bankruptcy picture, understanding it will help you keep your situation in perspective. For many, it’s reassuring to know that you’re not alone in your financial struggles.

Why People File for Bankruptcy

Historically, these are the most common reasons for filing for bankruptcy:

• job loss, followed by an inability to find work that pays nearly as well
• medical expenses that aren’t reimbursed by insurance or government programs
• divorce or legal separation, and
• small business failures.

Once a financial catastrophe strikes, many of us wind up taking on significant debt just to weather the storm. If we saved enough, maybe we’d be ready for these unexpected twists and turns. But, for a variety of reasons, many of us aren’t prepared. Let’s take a closer look at how we become so financially overextended.

Don’t Feel Guilty About Filing for Bankruptcy

Perhaps irresponsible spending brought you to this point. It happens. But it’s just as likely that isn’t the case at all. The cost of living has outstripped salaries for many years now, and if you’re like most, you’ve struggled to make ends meet for some time. If an illness, loss of work, or underemployment struck, you likely depleted any emergency fund quickly, leaving no choice but to turn to credit and fall into debt.

Bankruptcy is in place to provide a financial safety net. It’s based on forgiveness rather than retribution and is a truly worthy part of our legal system. It helps keep families together, frees up income and resources for children, reduces suicide rates, and keeps the homeless population from growing even more extensive. In short, bankruptcy provides a chance for a fresh start and a renewed, positive outlook on life.

So if you are grappling with guilt, feel free to let it go. Banks issue credit cards because they are profitable, even though some credit card debts are wiped out in bankruptcies and never repaid. It’s a cost of doing business.

What About the Downside?

Despite its many benefits, bankruptcy also has disadvantages—economically, emotionally, and in terms of your future credit rating. The bankruptcy process can get intrusive. As part of your public filing, you must disclose your financial activities during the previous year or two—sometimes more—as well as your income, debts, and current property holdings.

If you have a bankruptcy on your credit report, you might need to explain to those you do business with that you made every effort to meet your financial obligations before resorting to bankruptcy. Whether you are renting or buying a home, purchasing or leasing a car, or seeking financing for a business, your bankruptcy will be counted against you, at least for several years, and will stay on your credit report for up to ten years. You’ll likely be able to get credit cards after bankruptcy; however, you will have a high interest rate, at least for a while.

Fortunately, the stigma bankruptcy used to carry has significantly diminished since the 2008 economic downturn. These days, only the older generations seem to prefer struggling under a mountain of debt rather than accepting the label of “bankrupt.” But even seniors are coming around. The bottom line is that bankruptcy will give you a financial breather. Plus, you’ll learn to live without credit and develop a more manageable relationship with your money.

Changes in Bankruptcy Law

In October 2005, Congress passed a law that changed the way bankruptcy works. One of the purposes of this law, known as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), was to cut down on Chapter 7 bankruptcies. It was drafted for the credit card and banking industries under the assumption that many would-be bankruptcy filers could afford to pay back at least some of their debt and should therefore be required to do so.

The hallmark of BAPCPA is what’s known as the means test. The means test calculations determine whether filers have sufficient “disposable” income to fund a Chapter 13 bankruptcy plan. In general, those with higher incomes are more likely to fail the test and be forced out of Chapter 7 bankruptcy. If you qualify for Chapter 7, you’ll have little or no income to spare.

This edition of How to File for Chapter 7 Bankruptcy incorporates new laws handed down by the nation’s bankruptcy courts, but new court decisions from bankruptcy courts, federal district courts, bankruptcy appellate panels (B.A.P.s), federal Circuit Courts of Appeal, and the

U.S. Supreme Court could come out after this book goes to print.

However, don’t let that concern you needlessly. Basic bankruptcy principles rarely change significantly except for amounts used in the means test calculations and property exemptions. If Congress overhauls the bankruptcy system significantly—perhaps by allowing filers to discharge student loans—you’ll likely hear about it on the news.

An Overview of Chapter 7 Bankruptcy

Chapter 7 bankruptcy is sometimes called “liquidation” bankruptcy.

It works by canceling most types of debt while allowing you to protect (exempt) property you’ll need to work and live. If you’re like most, you’ll be able to keep all or most of your property. But if you have too much, the bankruptcy trustee will sell or “liquidate” it and use the sales proceeds to pay creditors.

Even though bankruptcy falls under federal law, your state decides the type and amount of property you can exempt. Some states are more generous than others, so exemptions vary widely. (See Ch. 3 for exemption information; see www.nolo.com/back-of-book/HFB.html for exemption lists. Federal exemption amounts are valid through April 1, 2025; however, state exemptions aren’t current—you must verify state exemptions independently.)

Here is a brief overview of the Chapter 7 bankruptcy process, from start to finish.

What Bankruptcy Costs

The entire Chapter 7 bankruptcy process takes about three to six months to complete. Usually, it requires one brief meeting with the bankruptcy trustee—the official appointed by the bankruptcy judge to process your bankruptcy. You’ll pay $338 in filing fees unless you get a fee waiver (the amount increases on December 1, 2023). If you use a lawyer, you can expect to pay an additional $1,800 or more in legal fees. Of course, you can save most of this money by representing yourself with the help of this book. (See Ch. 10 for information on finding lawyers.)

Mandatory Credit Counseling

Before you can file for bankruptcy, you must consult a nonprofit credit counseling agency. The purpose of this consultation is to see whether there is a feasible way to handle your debt load outside of bankruptcy without adding to what you owe. You can complete this mandatory credit counseling course online or over the phone.

To qualify for bankruptcy relief, you must show that you received credit counseling from an agency approved by the U.S. Trustee’s office within 180 days before you file.

Once you complete the counseling, the agency will give you a certificate showing that you participated. It will also give you a copy of any repayment plan you worked out with the agency.

There are a few exceptions to this counseling requirement. You don’t have to participate if you are in the military on active duty, incapacitated, or have a disability that prevents you from participating. Also, suppose you try unsuccessfully to get counseling with an approved agency at least seven days before filing for bankruptcy. In that case, you can ask the court for an additional 30 days to complete your course. You’ll have to explain why you weren’t able to fulfill the requirement. The court will grant the request if you can show that your honest effort to secure counseling was thwarted due to circumstances beyond your control.

The purpose of credit counseling is to give you an idea of whether you really need to file for bankruptcy or whether an informal repayment plan would get you back on your feet. Counseling is required even if it’s evident that a repayment plan isn’t feasible (that is, your debts are too high and your income is too low).

The law requires that you participate—not that you go along with whatever the agency proposes. Even if a repayment plan is feasible, you don’t have to agree to it. However, you must file any plan with the other required bankruptcy paperwork. (See Ch. 6 for more information on the credit counseling requirement, including how to get the certificate of completion that you’ll have to file with your other bankruptcy papers.)

Filing Your Papers

To begin a Chapter 7 bankruptcy case, you must complete a packet of forms and file them with the bankruptcy court in your area. Many filers are shocked to see the long list of documents required in a Chapter 7 case. But don’t be alarmed: The forms aren’t difficult to complete. But they do take time. Follow the detailed instructions in Ch. 6, and you’ll do just fine.

Once you file your paperwork, the court will mail a notice of your bankruptcy filing to you and your creditors. The notice sets a date for the meeting of creditors (see “The Meeting of Creditors (341 Hearing),” below), provides the trustee’s name, address, and telephone number, and gives creditors the deadlines for filing objections to your bankruptcy or to the discharge of particular debts.

The Voluntary Petition

You begin a Chapter 7 case by filing a Voluntary Petition. This official court form works like a coversheet and requests a bankruptcy discharge of your debts. You’ll provide basic information, including your name, address, and the last four digits of your Social Security number, and information about your creditors, debts, and property. You’ll also disclose whether you have lived, maintained a residence or business, or had assets in the district where you are filing for most of the 180 days (91 days or more) before filing. You must meet this condition to have the right to file in that bankruptcy court district. You’ll also attest that you completed your prefiling credit counseling (later in your bankruptcy case, you’ll prove that you completed budget counseling). You’ll find line-by-line instructions for completing the Voluntary Petition in Ch. 6.

Additional Documents

You will have to submit quite a few more documents, either when you file the petition or (with a few exceptions) within 14 days after you file. These additional documents include lists of your creditors, assets, debts, income, and financial transactions; copies of your most recent federal tax return, bank statements, and wage stubs; a list of property you claim is protected by a bankruptcy exemption; and what you plan to do with property serving as collateral for a loan (such as a car or home).

Perhaps the most important forms are the “means test” forms you complete to determine whether you qualify for Chapter 7. You must compute your average gross income during the six months before your bankruptcy filing date and compare that to the median income for your state. If your income is more than the median, another form takes you through a series of questions to determine whether you could pay some unsecured debts in Chapter 13.

(See “Who Cannot File for Chapter 7,” below, and Ch. 6 for detailed information about these calculations.)

After you file, you might want to amend some or all of your forms to correct mistakes you discover or to reflect agreements you reach with the trustee. Amending these forms is relatively simple; we explain how to do it in Ch. 7.

The Automatic Stay

Often, people filing for bankruptcy have faced weeks, months, or even years of harassment by creditors demanding payment and threatening lawsuits and collection actions. Bankruptcy puts a stop to all this. Filing your bankruptcy petition creates a federal court order called an “Order for Relief” and informally known as the “automatic stay” that requires your creditors to stop all collection efforts. So, at least temporarily, most creditors cannot call you, write dunning letters, legally take (garnish) your wages, empty your bank account, go after your car, house, or other property, or cut off your utility service or welfare benefits. As explained in Ch. 2, the automatic stay is not absolute. Some creditors are not affected by the automatic stay. Others can get the stay lifted to collect their debts, as long as they get the judge’s permission first.

CAUTION
Renters beware. In most cases, the automatic stay’s magic will temporarily halt your eviction when you file for bankruptcy. The bankruptcy court will almost always lift the stay and let the eviction proceed upon the landlord’s request. (See Ch. 2 for more information on the automatic stay and eviction proceedings.)

Court Control Over Your Financial Affairs

By filing for bankruptcy, you are technically placing the property you own and the debts you owe in the hands of the bankruptcy trustee (see “The Trustee,” below). While your case is open, you can’t sell or give away any of the property you own when you file without the trustee’s consent. However, you can do what you wish with property acquired and income earned after filing for bankruptcy, with a few exceptions. You are also allowed to borrow money after you file.

The Trustee

The bankruptcy court exercises control over your property and debts by appointing an official called a “trustee” to manage your case. Your trustee’s name and contact information will be in the official notice of filing you receive in the mail several days after filing your petition. The trustee (or the trustee’s staff) will examine your papers to make sure they are complete and look for property to sell for the benefit of your creditors. The trustee’s primary duty is to see that your creditors are paid as much as possible. The trustee will be primarily interested in what you own and claim as exempt and financial transactions made during the previous years. In some cases, past transactions can be unwound, and the recaptured assets can be distributed to your credi- tors. Also, because the trustee receives a percentage of the recovered assets, the more the trustee finds for creditors, the more the trustee gets paid. So while it is tempting to believe the trustee is there to help you, it isn’t the case.

Some courts appoint full-time trustees called “standing” trustees to handle all cases filed in that courthouse. Other courts appoint trustees on a rotating basis from a panel of bankruptcy lawyers called “panel” trustees. Either way, the trustees have the same responsibilities.

The Meeting of Creditors (341 Hearing)

As explained above, you will receive notice of the date of your meeting of creditors (also called the 341 hearing) shortly after you file your bankruptcy papers. This meeting is typically held somewhere in a conference room in the courthouse or federal building (rarely in a courtroom). After checking your identification and swearing you in, the trustee will ask you standard questions all debtors must answer. For instance, you can expect to be asked if everything in your petition is accurate and whether anything has changed. The trustee might ask you additional questions about your particular bankruptcy and the documents you filed, too—for instance, how you arrived at the value for an item of property. This questioning usually takes about five minutes.

Creditors can attend this meeting but rarely do. Creditors who appear can also question you under oath. You might be asked where property serving as loan collateral is located or about the information given to obtain a loan. Some creditors might want to know more about the nature and location of your assets in general.

The good news? While many bankruptcy filers dread the 341 hearing, the concern is unnecessary. Most filers breeze through the process with no problem. And it will likely be the only personal appearance you’ll have to make. We discuss the creditors’ meeting in more detail in Ch. 7.

What Happens to Your Property

Each state allows debtors to keep certain property types or equity amounts in property. The exemptions available to you depend on where you lived before filing for bankruptcy. In your bankruptcy papers, you’ll be asked which items of property you claim as exempt. (For more information, see Ch. 3.)

If you have nonexempt property, you’ll have to either surrender it or provide the trustee with its equivalent value in cash after the creditors’ meeting. It’s unlikely that the trustee will inventory your home (although it can happen) or seize your property. Instead, you’ll voluntarily turn over the nonexempt property listed in your schedules or identified through some other means. If you don’t turn it over, the bankruptcy judge can order you to surrender the property and hold you in contempt if you don’t. Plus, the court can dismiss your bankruptcy petition if you fail to cooperate with the trustee.

If your nonexempt property isn’t worth very much or would be hard to sell, the trustee might “abandon” it—which means that you get to keep it, even though it’s nonexempt. Unless the debtor has a significant amount of cash, home equity, or luxury goods like a boat or rental property, most of the debtor’s property will be essentially worthless to creditors.

Secured Debts

If you’ve pledged property as collateral for a loan, the loan is a “secured debt.” The most common examples of collateral are houses and motor vehicles. If you are behind on your payments, a creditor can ask to have the automatic stay lifted so it can repossess the property or foreclose on the mortgage. However, if you are current on your payments, you can keep the property and continue making payments as before—unless you have built up enough nonexempt equity in the property to make it worthwhile for the trustee to sell it for the benefit of your unsecured creditors. (See Ch. 5 for more information on secured debts.)

If a creditor has recorded a lien against your property without your consent (for example, because the creditor obtained a money judgment against you in court), that debt is also secured. However, in some cases and with certain types of property, you might be able to wipe out the debt and keep the property free of the lien. This is called “lien avoidance,” and it is covered in Ch. 5.

Contracts and Leases

If you signed a contract or lease that’s still in effect, the trustee might take your place as a party to the contract if it would be beneficial for your creditors. This is known as “assuming” the contract. Alternatively, the trustee can “reject” the contract, in which case you would decide if you wanted the contract to continue in force.

For example, suppose you have a valuable five-year commercial lease at a below-market rate in an up-and-coming part of town. The trustee could hold an auction, assign the lease to the highest bidder, and use the profit to pay unsecured creditors. However, a trustee who doesn’t think selling the lease would be worth the trouble will take no action, which is the same as rejecting the lease.

You can keep leases on personal property, such as a car or business equipment, rather than have the trustee assume them. However, you can do this only if you can cure any defaults on the lease, as required by the creditor. (Ch. 6 explains how to list contracts and leases on Schedule G and how to use the Statement of Intention form to notify the trustee and creditors about the leases you’d like to assume.)

Personal Financial Management Counseling

All debtors must attend a course on managing finances to receive a bankruptcy discharge, sometimes referred to as budget counseling, debtor education, or predischarge counseling. You must take this course from an agency approved by the U.S. Trustee Program. You will be charged fees on a sliding scale, but you can’t be denied services because of your inability to pay. Once you complete your counseling, you must file a certification form with the court. For a list of approved agencies, go to the U.S. Trustee’s website, www.usdoj.gov/ust, and click “Credit Counseling & Debtor Education.”

The Bankruptcy Discharge

About 60 days after the 341 hearing—the one hearing all filers must attend—you will receive an Order of Discharge from the court. This notice doesn’t list your particular discharged debts. Instead, it provides general information about the debts affected by the discharge order. In most cases, the discharge order eliminates all debts except the following:

• debts that automatically survive bankruptcy (child support, most tax debts, and student loans are examples), and
• debts that the court has declared nondischargeable due to an action brought by a creditor (such as debts incurred through fraudulent or willful and malicious acts).

Ch. 9 explains which debts are—and are not— discharged at the end of your bankruptcy case. Also, “Who Cannot File for Chapter 7,” below, explains the circumstances in which your entire discharge—not just the discharge of a specific debt—might be denied.

After Bankruptcy

Once you receive your bankruptcy discharge, you are free to resume your economic life without reporting your activities to the bankruptcy court. However, a few exceptions exist. Suppose you receive (or become eligible to receive) an inheritance, insurance or lottery proceeds, or proceeds from a divorce settlement within 180 days after your filing date. In that case, you must report the assets to the trustee. If you don’t, and they are discovered, the trustee (and the court, if necessary) can order you to turn over the assets and your discharge could be revoked.

After bankruptcy, public or private employers can’t discriminate against you solely because of the bankruptcy, although this ban on discrimination has exceptions (discussed in Ch. 8). You can start rebuilding your credit almost immediately, but it might take several years to get decent interest rates on a credit card, mortgage, or car note.

If you fall into debt again, you won’t be able to get another Chapter 7 debt discharge until eight years have passed (starting from the last filing date). You won’t qualify for a Chapter 13 discharge until four years have passed. Even so, sometimes filing for Chapter 13 is beneficial without a discharge. For instance, filing a Chapter 13 can help stop a wage garnishment or spread out payments on support arrearages.

Who Cannot File for Chapter 7

Filing for Chapter 7 bankruptcy is one way to solve debt problems, but it isn’t available to everyone. You might not be able to use Chapter 7 to discharge debt if one of these situations exists.

You Can Afford a Chapter 13 Repayment Plan

Under the bankruptcy rules, filers with higher incomes must pay back some of their debts over time under Chapter 13 rather than discharging their obligations outright in Chapter 7. If the U.S. Trustee decides that your income, debts, and expenses indicate that you can afford a Chapter 13 plan under the rules, it will file a motion to have your case dismissed. The court is likely to grant that motion and throw out your case unless you convert to a Chapter 13 bankruptcy.

To figure out whether you can discharge your debts in Chapter 7, you must first:

• determine your “current monthly income” (your average income during the six months before you file for bankruptcy)
• multiply your current monthly income by 12, and
• compare that figure to the yearly median family income in your state for the same size household.

If your current monthly income (multiplied by twelve) is no more than the state’s yearly median income, you’ll qualify for a discharge. Your Chapter 7 bankruptcy won’t be presumed to be “an abuse” of the bankruptcy process. However, even if you pass this test, you could be forced into Chapter 13 if your actual income is significantly higher than your expenses (explained in Ch. 6).

If your income exceeds the state median income, you will have to do some calculations to determine whether you can afford to pay off at least some of your unsecured debts in a Chapter 13 plan. This qualification process is known as the means test. (You can find step-by-step means test instructions in Ch. 6.)

You Have Marijuana Assets

Over the past several years, some states have legalized the personal or medical use of marijuana. Under these laws, an individual or business might possess a relatively small amount of marijuana for personal use or have significant inventory in a dispensary. Either way, filers with marijuana assets might think that they can turn to bankruptcy, believing that the industry is legal in their home state. It’s not the case.

Marijuana remains illegal under federal law. The U.S. Trustee Program works to dismiss cases violating the Controlled Substances Act and ensure that marijuana-related assets don’t enter the bankruptcy system. For instance, in 2020, an Oregon bankruptcy court dismissed a Chapter 11 case involving two marijuana-growing tenants. Because marijuana possession is a violation of the Controlled Substances Act, a filer could also be subject to criminal penalties. If you’re concerned that this problem might arise in your matter, speak with an attorney familiar with the issue.

Determine Your Current Monthly and Yearly Income

Legally, your income for the means test is your average income over the six months preceding the month in which you filed for bankruptcy. You must include almost all types of income (with a few exceptions such as benefits received under the Social Security Act), taxable or not. The calculations are based on your gross earnings, not the net income you actually take home after taxes and other deductions for the first portion of the test. For filers who lost jobs or other income during the six months before filing, this income figure could be significantly more than what they are actually earning currently.

Use the Current Monthly and Yearly Household Income Worksheet on this book’s companion page (www.nolo.com/back-of-book/HFB.html) to calculate your household income. You’ll find the figure by:

• adding all income received during the full six months before filing for bankruptcy
• dividing it by six (this is your current monthly household income for the means test), and
• multiplying the current monthly income figure by 12.

You should include all of the following types of income on the form:

• wages, salary, tips, bonuses, overtime, and commissions
• gross income from operating a business, profession, or farm
• interest, dividends, and royalties
• rents and other income from real property
• pension and retirement income
• regular contributions someone else makes to your or your dependents’ household expenses, including child or spousal support
• regular contributions of a spouse filing for bankruptcy with you
• unemployment compensation (some states will require state unemployment insurance benefits)
• workers’ compensation insurance
• state disability insurance
• annuity payments, and
• lump-sum, windfall payments (such as lottery winnings).

 

Determine Your Household Size

The size of your household is also significant. The more members you have, the less likely it will be that your income will exceed the state median for a family of the same size. You’ll qualify for a Chapter 7 discharge without taking the second part of the means test. For example, assume that your yearly household income is $60,000. In your state, the median income for a household of three is $58,000, and the median income for a family of four is $62,000. Being able to count that additional person means you will pass the means test without further calculations.

Unfortunately, neither Congress nor the courts have given clear guidance on how to calculate household size. Many courts adopt the census test for a household. You’d include all of the people, related and unrelated, who occupy a house, apartment, group of rooms, or single room intended for occupancy as separate living quarters. Under this test, you can count your children or stepchildren.

However, some courts allow debtors to count only qualifying dependents. Other courts use the economic unit approach to household size. This formula would include individuals who financially depend on or support the debtor or whose income and expenses are closely intermingled with and connected to the debtor’s income.

Roommates are not part of the same household. Typically, they have separate rooms within a house and don’t act as a single economic unit by mingling their incomes and jointly paying expenses.

Another issue can arise when children can be counted as part of a household but don’t live with the parent exclusively due to a custody and visitation agreement. In general, the answer depends on the rules in your jurisdiction. If you need to count children who also live with another parent to pass the means test, talk to a local bankruptcy attorney and determine how your local court handles this issue. (See Ch. 10 for information on finding a bankruptcy lawyer.)

Compare Your Yearly Income to Your State’s Family Median Income

Once you’ve got your family’s yearly income, find out whether it’s more or less than the median. You’ll find the current amounts on the U.S. Trustee website at www.usdoj.gov/ust (select “Means Testing Information”).

What to Do Next

If your yearly income is equal to or less than your state’s median, then you’ll likely qualify for Chapter 7 bankruptcy. As you’ll discover, however, the actual monthly income and expenses you report on Schedules I and J could prevent you from receiving a discharge even if you pass the means test. This can happen because the means test averages your income over the six months before you file. As a result, your means test income could be substantially different from your actual monthly earnings. For instance, if you were unemployed for six months but accepted a well-paying position one month before filing for bankruptcy, this problem could crop up.

Here’s how this could come up: The trustee appointed to your case will review the monthly income and expenses listed on Schedules I and J. If you earn significantly more than what’s needed to pay your monthly expenses, you’ll likely have to convert to Chapter 13 or face dismissal.

Let’s look at a different problem now. Suppose your yearly income exceeds the state median income. You won’t be excluded from Chapter 7 automatically. The second part of the means test will allow you to subtract certain expenses from your income. If you don’t have enough left over to make a meaningful payment to creditors, you’ll still pass the means test and be eligible for a Chapter 7 discharge.

If you don’t qualify after completing the second portion, you’d have to persuade the court that it’s appropriate for you to file for Chapter 7 under the circumstances. (See “Special Problems” in Ch. 7.) You can find step-by-step instructions for completing the means test in Ch. 6.

If you don’t qualify for Chapter 7, consider learning more about Chapter 13 bankruptcy using Nolo’s Chapter 13 Bankruptcy, by Cara O’Neill. Alternatively, you can explore options other than bankruptcy in “Alternatives to Chapter 7 Bankruptcy,” below.

You Previously Received a Bankruptcy Discharge

Because bankruptcy is such a powerful tool, you’re limited to how often you can use it. For instance, you can’t get another Chapter 7 discharge until eight years have passed. If you previously filed for Chapter 13, your waiting period will be six years.

Note that these eight- and six-year periods run from the date you filed the earlier bankruptcy, not the date you received your discharge.

EXAMPLE: Madison filed a Chapter 7 bankruptcy case on January 31, 2015. She received a discharge on April 20, 2015. Madison files another Chapter 7 bankruptcy on February 1, 2023. The second bankruptcy is allowed because eight years have passed since the filing date of the earlier bankruptcy (even though fewer than eight years have passed since Madison received a discharge in the earlier case).

A Previous Bankruptcy Was Dismissed Within the Last 180 Days

You won’t qualify for a Chapter 7 bankruptcy discharge if you had a Chapter 7 or Chapter 13 case dismissed during the previous 180 days if you did either of the following:

• violated a court order, or
• requested the dismissal after a creditor asked for relief from the automatic stay. (11 U.S.C. § 109(g).)

You’d have to wait at least 180 days before filing again. This rule is in place to prevent people from gaming the system. For instance, filers have been known to file for Chapter 13 and use the automatic stay to prevent a lender from selling a home at auction with no intention of proposing a feasible plan. If the lender had asked the court to lift the stay to allow the auction to proceed and the filer dismissed the case subsequently, the 180-day rule would apply.

Another rule limits the extent of the automatic stay’s protection on subsequent filings within the same year. The automatic stay will only remain in effect for 30 days when filing a second time. It won’t go into effect on any filings after that. However, the filer can ask the court to put the automatic stay in place.

You Haven’t Met the Credit Counseling Requirements

To file for Chapter 7 bankruptcy, you must satisfy all the requirements for credit counseling. You must receive the counseling within 180 days before you file and file a certificate of completion no later than 14 days after you file. Some exceptions to the counseling requirement exist, but they’re challenging to meet. (See Ch. 6 for more on these requirements.)

You Defrauded Your Creditors

Bankruptcy helps honest debtors who get in too deep financially and need a fresh start. A bankruptcy court will not help someone who has played fast and loose with creditors or the court. This type of behavior can lead to a denial of your bankruptcy discharge and even to criminal charges.

The bankruptcy court isn’t the place to try to skirt the law. A debtor can only do so many things to come out ahead, and filers should assume that anything they could dream up has failed before. Certain activities are red flags to the courts and trustees. If you have done any of these things within the past several years, consult with a bankruptcy lawyer:

• selling assets to friends or relatives for less than what the property is worth
• incurring debts for luxury items when broke and without the intent to pay, and
• any attempt at concealing property or money from creditors.

Your Filing Constitutes “Abuse”

The court can dismiss your case if it finds that your filing is abusive or your actions demonstrate that you aren’t entitled to the remedy offered by Chapter 7. As explained above, if you fail the means test, the court will presume that your bankruptcy filing is abusive and prevent you from using Chapter 7. However, even if you pass the means test, the court might find abuse. For example, if your actual income (listed in Schedule I) exceeds your actual expenses (listed in Schedule J), the court might decide you have too much disposable income for Chapter 7. This can happen even if you pass the means test.

TIP
Here's how much disposable income you can show on the means test forms and Schedules I and J. According to the means test forms, a Chapter 7 debtor could have up to $151.25 in disposable income. Cases with disposable income over that amount were presumed abusive and, depending on the amount of unsecured debt, subject to dismissal. Here’s the problem. It’s possible to show more disposable income on Schedules I and J than on the means test. Why? Because the means test looks at prior income, and Schedules I and J reflect your current income and expenses. If the discrepancy is significant enough, the Chapter 7 trustee might ask the bankruptcy court to “convert” or change your matter to Chapter 13.

Here are some other reasons the court might deny you the benefit of Chapter 7 when you otherwise qualify:

• The court can refuse to grant a Chapter 7 discharge if the debtor fails to keep records that can be used to verify the debtor’s financial condition. (In re Tanglis, 344 B.R. 563 (Bankr. N.D. Ill. 2006).)
• If the debtor fails to explain what happened to money withdrawn from a business or fails to disclose property, the court can refuse to grant a Chapter 7 discharge. (In re Beatty, 583 B.R. 128 (Bankr. N.D. Ohio 2018).)
• Voluntary unemployment can be considered abusive when the debtor could pay back some or all of the debts if employed. (In re Richie, 353 B.R. 569 (Bankr. E.D. Wash. 2006).)
• A debtor who can’t account for cash advances used during the previous year could be denied a Chapter 7 discharge on the grounds of abuse. (In re Yanni, 354 B.R. 708 (Bankr. E.D. Penn. 2006).)

These types of cases are unusual because they’re somewhat difficult to prove. For instance, in an omitted asset case, the creditor must first prove that the debtor failed to include an asset. Even if the creditor can do so, the court will accept a reasonably plausible explanation for the omission from the debtor. A creditor would need to be sure of the facts before willingly incurring the cost to try such a case.

You Are Attempting to Defraud the Bankruptcy Court

Misleading the court is a terrible idea. If you lie, cheat, or try to hide assets, your current debt crisis might no longer be your biggest legal problem. You must sign your bankruptcy papers under “penalty of perjury,” swearing that everything in them is true. You also have to verify the information you provided under oath at your creditors’ meeting. If you get caught deliberately failing to disclose property, omitting material information, using a false Social Security number (to hide your identity as a prior filer), or committing some other inappropriate act, you won’t get bankruptcy relief. You might even be prosecuted for perjury or fraud on the court.

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