Requirements to Qualify for Chapter 7: What You Need to Know Before Filing Chapter 7 Bankruptcy in California


Chapter 7, also known as “liquidation” or “straight” bankruptcy is intended for debtors who have no ability to pay any of their unsecured debts on a monthly basis. The point of bankruptcy in general is to obtain a discharge of debt, meaning that the debtor will never have to pay that debt, giving him a fresh financial start. Although some debts are not dischargeable, for the majority of debts that can be discharged, the bankruptcy discharge is among the most powerful remedies available under the law. In a Chapter 7 case, the discharge can be obtained promptly -- the typical Chapter 7 case lasts as few as 90 days from filing date to discharge, assuming there are no assets for the Chapter 7 trustee to liquidate and and no auto loan to reaffirm, each of which will generally cause the case to last longer.

Chapter 7 Bankruptcy Discharge Offers Fresh Start
The downside to filing for Chapter 7 is that the debtor is not allowed to keep assets in excess of the available exemptions applicable in his or her case. As we explain in our article on bankruptcy exemptions, these are dollar values which are categorized according to the type of asset: home, car, personal effects, tools of the trade, retirement savings, etc. Some exemptions are quite generous (retirement accounts often are totally exempt, for example), while others are relatively small. If the Chapter 7 debtor has more assets than he or she is allowed to keep under the available exemptions, then the Chapter 7 Trustee assigned to the case will seize such assets and liquidate them. Upon liquidation, the Trustee will, after paying his or her own expenses arising from the liquidation, distribute the remaining non-exempt value to the Chapter 7 bankruptcy debtor’s creditors. Because filing Chapter 7 can result in the loss of substantial assets, and furthermore, because a Chapter 7 debtor has no right to dismiss a Chapter 7 case once it is commenced, it is imperative that anyone considering Chapter 7 bankruptcy seek representation by an experienced Bankruptcy Attorney. At the Law Offices of Jon G. Brooks in San Jose, California, we take extraordinary care to analyze the values of every client’s assets before we file a Chapter 7 bankruptcy case, and we carefully explain what a client will and will not be allowed to keep if we proceed with a Chapter 7 bankruptcy.

Once the Chapter 7 bankruptcy petition is filed, the bankruptcy petitioner will be given a date for his or her Meeting of Creditors (also known as a 341 Meeting for the section of the Bankruptcy Code which requires the meeting), which is generally scheduled for about a month after the bankruptcy petition is filed. Your skilled, established San Jose bankruptcy lawyers at the Law Offices of Jon G. Brooks will always appear at your Meeting of Creditors with you. After the creditors meeting, the debtor has 45 days to complete the second of the new debtor education requirements by passing an approved financial management course. Upon satisfactory completion of this course, the provider will again issue a certificate of completion to the debtor which must then be filed with the Bankruptcy Court before the debtor may be granted a Chapter 7 discharge.

How Do I Qualify for a Chapter 7 Discharge? Debtor Means Testing in Chapter 7

Above, we have discussed assets in Chapter 7, but how does one qualify for a Chapter 7 discharge? Put simply, to be eligible for a Chapter 7 bankruptcy, a debtor’s household income must be insufficient to pay his or her debts. In order to determine whether a debtor can afford to pay any of his or her debts, Chapter 7 Bankruptcy law compares the debtor’s annual income to the annual median income based on family size of the state where the debtor lives. Provided that the debtor’s income is lower than his or her state’s median annual income for the same family size, and provided that the debtor’s actual monthly living expenses leave no disposable income with which to pay toward unsecured debts such as credit cards, medical bills, and judgments, then the debtor will generally qualify for a Chapter 7 bankruptcy discharge. Current state annual median income by family size information is regularly published by the U.S. Census Bureau.

Chapter 7 Debtor Means Testing
If the debtor’s annual income is greater than his or her state’s median income for the same size family, then the debtor must pass a “means test” in order to qualify for a Chapter 7 bankruptcy discharge. The means test portion of a Chapter 7 Bankruptcy petition is contained in official form B22A. The means test takes into account the current monthly income of the debtor together with the state median income for the debtor’s state. The means test also compares the debtor’s income with IRS published “standards” for allowable living expenses on both a national and a local basis. The local living expense standards take into account such items as metropolitan housing costs and transportation expenses. Note that here in San Jose and the Bay Area generally, living expenses are calculated to reflect the higher cost of living relative to other areas. The means test is aimed at determining whether, based on the debtor’s income and the IRS determined “allowable living expenses”, the debtor can afford to pay his or her unsecured debts. If the debtor has no more than $100 of “disposable income” after allowed expenses, then he or she will pass the means test and the debtor can still qualify for filing a Chapter 7 bankruptcy even if his or her annual income is above the median income of similar family sizes for his or her state. If the debtor’s monthly disposable income falls above the $166 monthly mark, the debtor cannot qualify for a Chapter 7 bankruptcy. If on the other hand, the debtor’s monthly disposable income falls between $100 and $166 per month, then his or her eligibility for filing Chapter 7 is then determined by whether the debtor could pay at least 25% of his or her unsecured debt (at $166 per month over five years or $6,000 in the aggregate) in five years. It is important to note that if the debtor’s debts are primarily “non-consumer” debt, arising, for example from expenses incurred in the operation of a business, then such a debtor is exempted from having to pass the means test. In that event, Chapter 7 eligibility reverts to the simpler analysis of comparing current monthly income with necessary living expenses, but without reference to the standards for allowable living expenses incorporated into the means test.

Presumption of Abuse in Chapter 7 Bankruptcy

Among the most fundamental changes in the 2005 Bankruptcy Law changes (BAPCPA is that it shifts the legal presumption favoring the debtor’s discharge to a presumption of abuse by the debtor which would in turn lead to a dismissal of the debtor’s petition. Note, however, that this “presumption of abuse” does not arise if the debtor’s monthly net income after allowed necessary expenses does not exceed $100.

To discuss whether you qualify for Chapter 7 bankruptcy, filing requirements or to schedule a free consultation with one of our experienced bankruptcy attorneys, please call us at 408.286.2766. Prior to our appointment, we ask that you download our Personal Bankruptcy Questionnaire, fill it out to the best of your ability, and bring this information with you to your meeting. Our office is located in San Jose, CA.

We are proud to be a Debt Relief Agency as defined by federal law. We help people get out of debt by filing for relief under the Bankruptcy Code.


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