Chapter 7 is the quickest form of debt relief outside of winning the lottery.


CHAPTER 7 IS YOUR SHIELD

Chapter 7 stops debt collector phone calls, lawsuits, wage garnishments and pretty much any other forms of collection dead in their tracks. Why? Because a provision in the Bankruptcy Code called the "automatic stay" kicks in immediately when your case is filed and prohibits almost all such collections.


HOW CHAPTER 7 WORKS

Chapter 7 bankrutpcy is a liquidation proceeding. Liquidation is the process of turning your assets into cash so the cash can be distributed among your crediotrs. However, in the vast majority of chapter 7 cases, there is no property to liquidate.


THE BANKRUPTCY ESTATE

When the case is filed, a legal umbrella called the "bankruptcy estate" is created. The bankruptcy estate comprises of ALL your legal and/ or equitable interests anywhere in the world as of the filing date of the petition. The property becomes what is know as the "property of the estate."


CHAPTER 7 TRUSTEE

A court appointed official called the "chapter 7 trustee" administers the bankruptcy estate and your chapter 7 case. The trustee's ultimate goal is to sell ("liquidate") the assets that remain in the estate after you pull certain assets out to keep for yourself using your exemptions.


Because the trustee receives a commission from the sale, you should think of the trustee as a wolverine when it comes to looking for assets; albeit this wolverine is only interested in valuable assets that can be sold at a profit.


If any assets are administered, the trustee takes a portion of the proceeds as a commission, uses a portion to pay costs, and distributes the remainder to creditors. Any remaining balances on debts that are eligible for discharge are eliminated / wiped-out. The case is closed and you get on with your financial fresh start.

THE NO-ASSET CHAPTER 7

The vast majority of chapter 7 bankurptcy cases are "no-asset" cases. No-asset cases are cases where the person filing bankruptcy (called the "debtor") can remove all the valuable property the estate by using available exemptions as discussed above, leaving the estate with no valuable assets.


Because the trustee can only sell property of the estate, after the property is removed from the estate there is nothing for the trustee to liquidate. When there are no assets to liquidate, all dischargeable debts are simply eliminated. No-asset cases are typically over in as little as 4 months!


CHAPTER 7 ELIGIBILITY - Am I eligible for chapter 7 bankruptcy?

Unlike popular misconceptions, chapter 7 isn't available to everyone. You must qualify for chapter 7 debt relief. A consumer must pass a statutory qualification formula called the "MEANS TEST." The case must also be filed in "good faith," and it cannot be deemed as "abusive" under the "totality of the circumstances" test. In most cases, the latter two tests are seldom a problem. The means test, however, may force some consumers into a chapter 13. All three tests are discussed below.

Chapter 7 Eligibility Tests

You must pass the following 3 tests to qualify for chapter 7 bankruptcy relief and not have your case converted to a chapter 13 or dismissed:

Means Test

The means test is the gateway to chapter 7 bankruptcy relief for consumers. It's a statutory congressional formula designed to calculate your disposable income and to force anyone who can at least partially repay unsecured creditors into a chapter 13.


To "pass" the means test and qualify for chapter 7 debt relief, your disposable income must be below certain thresholds (part #4) after applying the following formula:

FIRST, calculate your Current Monthly Income ("CMI").

  • 1. total your GROSS income from ALL sources, except Social Security, received in the last 6 months preceding the month you are filing.
  • 2. divide that total by 6 to get the CMI.
  • 3. multiply the CMI by 12 to get your Annualized CMI.
    • Take the Annualized CMI and move to part 2.
      You will apply the CMI from step #2 in part 3 of this formula.

Second, compare your Annualized CMI with the applicable Illinois median income for your household size (#2 to the right).

  • - If your annualized CMI is below the Illinois median, you will apply ACTUAL household expenses to your CMI in part 3 below, as long as the expenses are "reasonable and necessary." The expenses include payroll taxes, payments on secured debts, food, utilities, etc...
  • - If your annualized CMI is above the Illinois median, you will apply statutorily allowed expenses as provided by the IRS to your CMI in part 3 below.
    • Continue to part 3.

    Third, calculate your Disposable Monthly Income ("DMI").

      Apply the expenses to reduce your CMI (step #2 in the part 1 above):
    • A. If you are below median, subtract your actual monthly expenses. If an expense differs each month (e.g. electric bill), then use the average for that expense. OR
    • B. If you are above median, subtract the IRS standard expenses.
      • Your CMI - Expenses = your DMI.
        You can get your "60-month DMI" by multiplying by 60: DMI x 60 = "60-month DMI".

    Fourth, calculate Means Test.

      Your case is not considered abusive and you are elibigle for chapter 7 relief if your "60-month DMI" / DMI is:
    • A. $7,025 / $117 per month or less, OR
    • B. (i) not more than $11,724 / $195 per month, and (ii) insufficient to pay at least 25% of your nonpriority unsecured debt over a 60-month period.
        That's it! ;-)
        (Of course, I do all this hard work for you!)

      Result, and what it means to fail or pass.

        - If you pass, the presumption of abuse does not arise and you qualify for chapter 7 relief. The United States Trustee will still review your case by applying the remaining two tests below.
        - If you fail, the presumption of abuse arises and you are disqualified from filing under chapter 7.
            You can make a "special circumstances" argument in bankruptcy court to presuade the judge to allow you to proceed under chapter 7 on the basis of equity (fairness).
            Generally, the only special circumstances arguments entertained by bankruptcy judges relate to a serious medical condition, active military duty, or something truly out of the ordinary that prevents you from even partially repaying your debts. If there are no special circumstances then you must file under chapter 13 or your case will be dismissed.

    Means Test / BKguy nutshell:

      #1. Calculate your CMI and Annualized-CMI
    • - average monthly GROSS income from ALL sources (except Social Security Act income) for 6 months prior to month of filing is your CMI
    • - includes regular household contributions from family members
    • - includes income of spouse even if not filing with you if you are not separated and living in same household
    • - CMI above multiplied by 12= Annualized-CMI
      #2. above / below Illinois Median Income Level?
    • One Person Household: Annual: $47,485; Monthly: $3,958
    • Two Person Household: Annual: $59,861; Monthly: $4,989
    • Three Person Household: Annual: $68,721; Monthly: $5,727
    • Four Person Household: Annual: $80,776; Monthly: $6,732
    • Five Person Household: Annual: $88,876; Monthly: $7,407
    • Six Person Household: Annual: $96,976; Monthly: $8,082
    • Seven Person Household: Annual: $105,076; Monthly: $8,757
    • Eight Person Household: Annual: $113,176; Monthly: $9,432
    • For Additional Household Member in excess of 4: add $8,100 Annually / $675 Monthly
    • *Illinois Median Income Table effective as of April 01, 2013
      #3. Calculate your DMI and "60-month DMI"
    • A. Get your DMI: apply either actual average monthly expenses or statutory monthly expenses by subtracting from CMI.
    • B. Get your "60-month DMI": multiply DMI by 60.
      #4. PASS if "60-month DMI" / DMI not more than:
    • A. $11,725 / $195 per month, OR
    • B. (i) 25% of your nonpriority unsecured debt and (ii) not less than $7,025 / $117 per month
      Result: the meaning of pass / fail:
    • A. If you passed, you qualify for chapter 7 relief, but your case is still reviewed by the United States Trustee for abuse under the remaining two tests explained below.
    • B. If you failed you may still be eligible to file by showing special circumstances such as a serious medical condition or call to active military duty or file under chapter 13.
    Image is courtesy of Best Case Bankruptcy Software

    Totality of Circumstances (TOC) Test

    The TOC test is like the savy "street smart" older brother to the dry mechanical means test. It's similar to the special circumstances discussed above that can qualify you for a chapter 7 even if you failed the means test. However, the totality test works to disqualify you from a chapter 7 even if you passed the means test. You can think of the TOC test as a fairness test. It attempts to answer the question: whether a full discharge of that person's debts is fair to his or her unsecured creditors?

    Under the TOC, the U.S. Trustee reviews your chapter 7 case looking to identify objective factors of an unreasonable or excessive budget. Such factors include unreasonable expenses, lavish lifestyle (e.g. luxury home or car, or too many cars), stability of income, excessive purchases, etc..

    If the trustee concludes that the factors above are keeping you from paying at least a portion of your income to unsecured creditors even if you passed the means test, the trustee will make a motion in bankruptcy court to either convert your chapter 7 case into a chapter 13, or dismiss it for abuse.


    The bankruptcy judge will listen to both sides, and, guided by the Bankruptcy Code and case law, will use discretion to make a decision. The trustee's office does not raise this objection often, but when they do, they almost always win.

    As your Chicago bankruptcy attorney I will identify any issues before your case is even filed.

    T.O.C. / BKguy nutshell:

      U.S. Trustee reviews the practical aspects of your case looking for factors of abuse of the bankruptcy process:
    • - lavish lifestyle
    • - unreasonable expenses
    • - may object to have case converted to chapter 13 or dismissed

    Good Faith Test

    The good faith test is best viewed as a general discretionary "catch all" provision.

    This test is similar to the totality test but more abstract because instead of attacking an objectively excessive lifestyle, it attacks the intent for seeking chapter 7 bankruptcy protection. In other words, the "good faith" test seeks to disqualify you from chapter 7 relief for failure to abide to the general principles of the Bankruptcy Code. It's probably best to think of this test as the "smell test."

    Under this test, the U.S. trustee reviews your entire situation to make sure the case was filed for the right reasons - i.e. for the honest purpose of getting a fresh start from burdensome debt.

    One example of a bankruptcy case not filed in good faith (or filed in bad faith), would be a case that is filed solely to use the bankruptcy process to reject a personal service contract you can perform.

    Good Faith Test / BKguy nutshell:

      The U.S. Trustee's "Smell Test" :
    • - used to enforce the underlying principles behind the Bankruptcy Code with the main one being: a fresh start for the honest but unfortunate debtor.
    • - the "catch all" provision of the Bankruptcy Code
    • - chances are great it won't apply to you, else I will identify it

    Chapter 7 Discharge

    The chapter 7 discharge releases you from personal liability on virtually all debts. In other words, the discharge wipes out debts by 1) announcing to all included creditors (and even certain creditors that were not included) that you are no longer legally obligated to pay the debts, and by 2) placing on injunction (a sort of legal prohibition) on any attempts to collect the discharged debts.


    After the bankruptcy judge orders the discharge, you can still pay back any and all of the discharged debts if you want, but you don't have any obligation to do so and the creditors cannot even attempt to collect - EVER! If they do, as your Chicago bankruptcy lawyer, I can re-open the bankruptcy case and ask the bankruptcy judge for sanctions against that creditor.

    Dischargeable Debts

    Generally, chapter 7 is used to discharge typical consumer debts. The following debts are most common:

    • - Credit card balances;
    • - Medical bills;
    • - Personal unsecured loans such as Payday loans;
    • - Certain taxes;
    • - Personal liability for secured loans if collateral is surrendered (returned to creditor);
    • - Certain court judgments.

    non-Dischargeable Debts

    Certain debts receive special treatment in bankruptcy and cannot be discharged. These include:

  • Alimony and Child Support: Debts incurred in a divorce or marital settlement agreement for the support of your former spouse or your child are not dischargeable in chapter 7. However, some of these debts can be discharged in chapter 13.
  • Student Loans: Student loans (whether federal or private) are dischargeable under either chapter 7 or chapter 13 if you can prove "undue hardship." The catch is, under current case law the "undue hardship" standard is nearly impossible to prove. To date, no one filing a Chicago bankruptcy case has been able to meet the "undue hardship" standard. This is why student loans are considered "non-dischargeable."

    In certain cases, it may be possible to discharge other debts under chapter 7 to free up money in your budget for student loans. You can also consolidate the student loans under chapter 13. This will stop the accrual of late fees and debt collector harassment for up to 5 years so you can catch up in peace.

    For more information, check out the student loans section of this site.
  • Debts obtained through fraud:The Bankruptcy Code provides for a presumption of fraud on any debt of more than a total of $600 incurred within 90 days prior to filing for bankruptcy protection for the purchase of luxury goods. There is also a presumption of fraud for taking more than $875 in total cash advances within 70 days prior to filing.
  • Other common debts that are not dischargeable:
    1. - certain unpaid taxes;
    2. - parking tickets;
    3. - criminal penalties;