It would be logical to think that once the a person makes the decision to file for bankruptcy, one of the more agonizing aspects of the process is over, but there is still one very important hurdle to overcome – figuring out which chapter of bankruptcy a person is qualified to file. Chapter 7 is the type of bankruptcy most people know, and it consists of liquidating a person’s assets in order to pay-off creditors. The upside to Chapter 7 bankruptcy is that the debtor gets rid of almost all of his or her debts and can start over with a clean financial slate, but a downside is years of depressed credit scores that can limit a person’s ability to buy or home or obtain other financial assistance from banks and other lenders. Chapter 7 is the kind of bankruptcy most Americans choose if their debt is primarily consumer-based because the debt is almost always dischargeable in bankruptcy. In addition, Chapter 7 bankruptcy is also often selected by debtors with little personal or real property available to pay back creditors.

It used to be somewhat easier to get a discharge as a Chapter 7 debtor, but changes to the law made by Congress in 2005 now require debtors to pass a means test before they can access this type of bankruptcy. This new barrier is intended to identify those debtors with the ability repay from those who cannot. There are also other issues that stop a person from being able to file for bankruptcy. A discussion of the main reasons a person may be barred from bankruptcy will follow below.

Means Test

This test is essentially meant to determine if a debtor’s income is too high to qualify for Chapter 7 bankruptcy. If that is the case, the debtor would have to file under Chapter 13, which requires the debtor to repay creditors over a span of three of five years, depending on income. In order to decide if a debtor passes the means test, it is first necessary to calculate monthly income, based on earnings over the previous six months, and compare that number to a state’s median income. In Indiana, that number is $71,113 for the year or $5,926 for the month, for a family of four. If the debtor’s monthly income is equal or less than this amount, he or she is clear to file for Chapter 7. But, if it is higher, a second step is brought into the analysis. In this situation, the debtor must figure out if there is still money leftover to pay creditors after subtracting permitted monthly expenses. If so, the debtor cannot file for bankruptcy under Chapter 7.

Past Bankruptcies

Another issue that can bar a person from filing for bankruptcy is the existence of previous bankruptcies. If a debtor received a discharge in a Chapter 7 bankruptcy in the past eight years or a discharge in a Chapter 13 case in the previous six years, the debtor is not eligible for Chapter 7. This time limitation is measured from the time the debtor filed the petition in the earlier bankruptcy.

Credit Counseling

Finally, federal law requires all Chapter 7 bankruptcy filers to attend a credit counseling course within the 180-day period before the petition is filed. The counseling agency must be approved by the U.S. Trustee’s office and receive a certificate of completion to submit to the court. The only way a debtor can avoid this requirement is if one of the exceptions applies to his or her situation. These include: physical or mental disability or deployment in an active military combat zone.

Get Help

If you are overwhelmed by debts you cannot pay, talk to a bankruptcy attorney about your options for eliminating debt. Christopher L. Arrington represents clients in bankruptcy in the Indianapolis area, and can help you get creditors off your back. Contact him to schedule an appointment.