Before October 17th 2005, the judge would decide whether a debtor met with the requirements of Chapter 7. It was largely up to the discretion of the judges to assess the financial status of the debtor and this resulted in many cases in which extended Bankruptcy protection under Chapter 7 even if he or she was financially able to repay the debt through a repayment plan of a Chapter 13 bankruptcy.
However, this has since been changed and if the debtor is not able to fulfil the requirements of the Chapter 7, he or she may be subject to a repayment plan through a Chapter 13 bankruptcy. But what circumstances cause someone to be ineligible for Chapter 7?
Too high income
If the income of the debtor is too high, then he or she may not be eligible for Chapter 7. The test is done by comparing the average income of the debtor in the last six months with the state’s median income. The forms of eligible monthly income include salary, tips, wages, overtime commission and gross income from a business or farm, as well as income earned from royalties, dividends and rents.
Pension, workers compensation, annuity payments and unemployment compensation will be taken under consideration. If the debtor’s income is below or equal to the state’s median, then the filer must pass the second part of the test for chapter 7.
Debt can be repaid
Additionally, the debtor’s disposable income will be assessed. This is calculated by taking the monthly income and subtracting monthly expenses for food, rent, transportation, utilities and other allowable expenses. As long as the debtor has little or no disposable income, he or she is eligible to file for a Chapter 7 bankruptcy. One other criterion for filing is that the debtor cannot have received a discharge for a Chapter 7 bankruptcy in the last eight years.
As soon as a debtor’s petition is filed, an automatic stay is issued. The automatic stay prevents any creditors from continuing their collection efforts.