Chapter 7 Bankruptcy can help people who are in financial trouble to get rid of most of or all of their debt. In a Chapter 7 Bankruptcy, unsecured debt is often discharged, but the Chapter 7 filer has the option to surrender collateral in order to discharge secured debts or to keep the collateral and reaffirm the debt. Unsecured debt is debt that is not accompanied by a property interest in collateral. For example, car loans and mortgages are secured loans, because they are typically accompanied by property interests in the car or the house. But medical bills, credit card debt, and many other types of debt are unsecured.

Unlike Chapter 13 Bankruptcy where the filer makes monthly payments on an approved bankruptcy plan, Chapter 7 Bankruptcy simply gets rid of or “liquidates” the debt. Sometimes a Chapter 7 Bankruptcy is called a “Liquidation Bankruptcy.”

Who can File for Chapter 7 Bankruptcy?

To begin with, Chapter 7 Bankruptcy is available to both businesses and individuals. Chapter 7 Bankruptcy is the most common type of bankruptcy for individuals – according to the Administrative Office of the U.S. Courts, 874,337 Chapter 7 bankruptcies were filed in 2012 alone.

If you have filed for bankruptcy before, you may be unable to file for Chapter 7 Bankruptcy. You can only file for Chapter 7 Bankruptcy if it has been at least 8 years since a previous Chapter 7 Bankruptcy or 6 years since a previous Chapter 13 Bankruptcy.

What is the Chapter 7 Means Test?

In determining who can file for Chapter 7 Bankruptcy, a court will apply the Chapter 7 means test. The means test is complicated, and it will require the help of an experienced California Bankruptcy Attorney to see if you qualify.

Step one of the means test is to compare the Chapter 7 filer’s income over the last six months (adjusted to estimate their annual income) to the median annual income for their state. In 2013 in California, this was $48, 415 for a single filer, and ranges up to $75,656 for a household of four. $8,100 is added for each individual in excess of four. If the Chapter 7 filer’s income is less than the median annual income, they will likely pass the means test and may file.

If the Chapter 7 filer’s income is above the median income, the test becomes more complicated and depends on their disposable income. Disposable income is calculated based on a mix of the Chapter 7 filer’s actual expenses and several expenses that are set by the Internal Revenue Service. For example, in Alameda County for cases filed on or after November 15, 2013, local housing and utility expenses range from $414 for a single-person household without a mortgage to $2,962 for a 5-person household with a mortgage. Every county in California has different set expenses. The court will also look at local transportation expenses, and national standards for health care and expenses such as food and clothing.

After the Chapter 7 filer’s disposable income is calculated based on expenses, the court will determine how much of the filer can pay towards their debt during the next 5 years. If that number is greater than $11,725, there is a presumption that the Chapter 7 Bankruptcy filing is abusive.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code