What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is often referred to as “liquidation”. This may sound confusing, but think of it this way: ever heard the term “cash flow”? Cash can flow from person to person easily, just like water flows down a river. In a Chapter 7 Bankruptcy, your bankruptcy trustee will turn certain types of your property into cash (or “liquidate”), and that cash will then flow to your creditors to pay off your debts. In many Chapter 7 cases, all of the debtor’s property is exempt, so the trustee will have no assets to liquidate and distribute to creditors. The bankruptcy begins when you (and your attorney) file for bankruptcy with the court. You are no longer in bankruptcy when you receive a discharge.
The Chapter 7 Means Test
To qualify for Chapter 7 bankruptcy, you must first pass a “Means Test”. The Means Test has two steps. The means test can get very complicated so we at The Wright Firm, L.L.P. recommend you seek the assistance of an experience bankruptcy attorney. An extremely simplified version of the test looks like this:
- Step 1: Median Income Your monthly income is compared to the median income for a Texas family the same size as yours. “Median” is another way of saying “middle,” like the median in the middle of a highway. If you make the same or less money than the median income for a family your size, you qualify for Chapter 7 bankruptcy. If make more than the median income, you have to move on to Step 2 of the test.
- Step 2: Calculating Disposable Income If your disposable income over the next five years is:
- Less than $6,000 ($100/month) – You Pass
- Greater than $6,000 but less than $10,000 – You May Have Passed, (depending upon your allowed expenses)
- Greater than $10,000 – Sorry!
So, Should I file Chapter 7?
You may want to consider filing for Chapter 7 if you:
- Have no income or low income
- Have little or no money left after paying your necessary living expenses each month
- Rent or have little equity in your home
- Have few assets (or no assets) outside your furniture, clothing and other necessities.