Legal Updates

FAQ: “Why Can’t I Just Be in a Chapter 7 Bankruptcy?!”

When faced with a sea of financial challenges, individuals who begin considering bankruptcy go into it with the uninformed assumption that filing bankruptcy is as easy as filing the case with the Court, pushing a few buttons, and getting debts eliminated.

If only that were true!

Most individuals who come to our office wanting to file bankruptcy arrive thinking they will file a Chapter 7 bankruptcy and walk away with their debts eliminated and problems resolved, however, the Bankruptcy Code is much broader than just this one chapter, and with good reason! What the general public does not grasp, at first blush, is that although they know Chapter 7 to be the “simplest,” and thus, the most “desirable” kind of bankruptcy to file, it is actually the most stringent and the hardest one to qualify for.

If you think about it, this makes sense! Chapter 7, in the best case scenario, can give an individual a fresh start and a chance for financial rebirth, without having to pay another dollar to creditors. It should, logically, be the hardest to qualify under! The debtor walks away with everything and creditors are left with nothing. As the institution in charge of assuring that “social scales” are balanced, for a court to allow such a thing, the debtor has to walk into the bankruptcy in dire straights. A debtor must show that s/he has just not had the income or assets  to pay their creditors for quite some time. If the Bankruptcy Court and the Bankruptcy Trustee assigned to a Chapter 7 case find that the debtor in a Chapter 7 bankruptcy has had disposable income or assets with unexempt value under his/her name in the last few years, the debtor will likely not qualify for a clean discharge of his/her debts under this chapter without a detailed and prolonged audit of the debtor’s finances by the Trustee. These audits, usually time-consuming and requiring the Debtor to appear for depositions before the Trustee, will likely produce something that will trigger that payment into the bankruptcy be required for the debtor to receive the discharge they long for. This is why it is immensely important that a debtor’s financials be analyzed every which way by a qualified bankruptcy attorney before a Chapter 7 case is filed.

Understanding the Chapter 7 Bankruptcy Qualification Analysis:

• Means Test: The means test compares your household income to the median income in your state. If your income is below the median, your income qualifies for a Chapter 7 bankruptcy filing. The caveat here is, household income must qualify! If one spouse needs to file bankruptcy, the non-filing spouse’s income must be reported within the filing, with no adverse effect to the non-filing spouse, as the Means Test looks at household income. If your household income slightly exceeds the median, additional calculations are made to determine if you may still qualify for Chapter 7 bankruptcy. Once the income review and means test are completed, the analysis moves onto determining “exempt property.”
• Exempt Property: Chapter 7 allows debtors to keep certain exempt property, such as a primary residence, some personal items (up to a certain statutorily-determined value), and tools of the trade. This part of the bankruptcy analysis is where, many times, it is determined that a Chapter 7 is likely not a good avenue for some; as the remaining non-exempt personal property will prevent a “clean discharge” of the debts. For example, if it is determined that a potential debtor has $4,000 in value of non-exempt personal property, the Chapter 7 Bankruptcy Trustee will require this unprotected amount be paid into the bankruptcy estate for pro-rata distribution to creditors in exchange for the debt discharge.
• No Transfers: Chapter 7 trustees have a look-back period of approximately two years, pre-bankruptcy, which means they can scrutinize about two years worth of a debtor’s financial transactions prior to filing bankruptcy. If a debtor thinks that they can transfer property out of their name, prior to filing bankruptcy, in order to qualify for a Chapter 7, think again. It will likely be found by the Trustee, and the debtor’s discharge will be withheld until the value of that property is paid back into the bankruptcy estate. A Chapter 7 Trustee’s financial scrutiny will also assure to look at a debtor’s payment app transactions, like Zelle, Venmo, and CashApp. Each transaction made using one of these apps must be justified by the Debtor at the time of filing. Although it is understood that these payment apps are commonplace and used to pay necessary expenses like rent and childcare, any transaction that a Debtor cannot justify, document, and explain to a Chapter 7 Trustee will count as a potential transfer, and as such, be categorized as an amount that the Debtor needs to pay back into the bankruptcy estate.

Chapter 7 bankruptcy offers a lifeline to individuals drowning in debt, providing an opportunity for a new beginning. The process is complex, requiring a detailed understanding of the qualification criteria. Filing this kind of bankruptcy without a detailed financial analysis, will more likely than not, lead the debtor down a difficult road. If you find yourself considering bankruptcy, consult with a qualified bankruptcy attorney to navigate the legal intricacies and ensure the best possible outcome for your financial future.

By: Christina Vilaboa-Abel, Esq.