An individual, partnership, corporation, or other business entity may be eligible for relief under Chapter 7. Subject to the means test described below for individual debtors, relief is available under Chapter 7 regardless of the amount of debt or whether the debtor is solvent or insolvent. An individual with regular income, even if self-employed or operating an unincorporated business, may be eligible for relief under Chapter 13 provided that the debtor’s unsecured and secured debts do not exceed certain statutory limits.
Effect of Previous Filings
An individual cannot file under either Chapter 7 or Chapter 13 if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with a court order, or if the debtor voluntarily dismissed the previous case after secured creditors sought to recover the collateral pledged for their loans.
Mandatory Counseling
An individual may not file under Chapter 7 or Chapter 13 unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. There are exceptions in emergency situations and in districts without sufficient approved agencies to provide the required counseling.
Means Test
The bankruptcy law contains a “means test” to determine whether an individual may file for a liquidation under Chapter 7 or a debt adjustment under Chapter 13. The test applies only to individuals and only to those individuals whose debts are primarily consumer debts.
Basically, a debtor may file under Chapter 7 if his or her average monthly income for the six months immediately preceding the bankruptcy filing does not exceed the applicable median income for households of the same size in the debtor’s state of residence. If the debtor’s income exceeds the median, the debtor’s “disposable income” must be calculated by deducting a combination of standardized and actual living expenses (not including payments on debts listed in the bankruptcy). If the debtor’s disposable income is sufficient, under statutory standards, to pay all or a portion of his or her debts, the debtor must file under Chapter 13. However, if a debtor’s income exceeds the median but is insufficient to pay a part of his or her debts, the debtor may still file under Chapter 7. Certain disabled veterans and persons whose debts are business-related may file under Chapter 7 without reference to the means test.
The law presumes that a Chapter 7 filing by a debtor whose income exceeds certain prescribed limits is abusive, and must be dismissed or converted to Chapter 13. But the presumption may be rebutted in some cases. For example, a debtor who is unemployed may be able to show that he or she has no ability to repay debts, despite having an average income in excess of the applicable limit.
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