Qualifying for Chapter 7

One of the changes in the 2005 landmark bankruptcy legislation was the concept of “qualifying” for Chapter 7. Previously, a debtor was eligibile for Chapter 7 relief if doing so was not a substantial abuse. This in turn came to mean, essentially, that if a debtor could pay his creditors in hypothetical Chapter 13, it would be an abuse to allow him to “walk away” via a chapter 7.

The 2005 amendments kept the spirit of the prior practice with the following structure, taking it from a case-by-case view to a more objective, formula-based approach.

Step 1: “Current Monthly Income”

If average income over the six months prior to filing is LESS than the average state income for the debtor’s household size, then it’s not an abuse to file chapter 7.

The determination of “income” and the applicable household size have major consequences and often require attorney interpretation.

Step 2. The Means Test

If current monthly income is greater than the state average, the means test — a formula to determine whether a debtor “should” have leftover income to pay creditors — is applied. Here, average household expenses and actual debt payments (for homes, cars, and other “keeper” debts) are subtracted from Current Monthly Income to see if there is a surplus. If there is a surplus of roughly $150.00 per month or greater, then it is presumed that filing a Chapter 7 case would be an abuse — because the debtor theoretically could pay his creditors SOME money.

Step 3: Special Circumstances

Sometimes, a debtor has unusual income or expenses. What if income is artificially inflated due to a one-time payment? What if a debtor has provable high medical or transportation expenses? Debtors that “flunk” the means test can try to prove these special circumstances as a way to rebut the presumption that their chapter 7 case is abusive.

Gene Sollows is the managing attorney for the Plano office of Bailey & Galyen.  His common sense, down-to-earth approach and empathetic bedside manner make him uniquely qualified to handle the family and financial problems of north Texans.