Top Ten Questions (continued)
Question 3.
What is Chapter 7 Bankruptcy?
The goal of a Chapter 7 bankruptcy is to wipe out (“discharge”) your debts. In exchange for having your debts erased, you must give up all your property to your creditors. This sounds rather harsh, but the reality is not as bad as it sounds. You need only give up your “non – exempt” property, which for most people, once the proper exemptions are applied, amounts to nothing at all. In many cases, much or all of your property may be exempt. You will have a chance to determine what property is exempt with your bankruptcy lawyer prior to filing your bankruptcy petition.
Income also affects your eligibility for Chapter 7. If you make more than the median income based on household size, you will have to contend with something called the “means test.” This test helps determine if you can receive a Chapter 7 discharge or would be better suited to be in a Chapter 13 bankruptcy. Even if you fail the means test, special circumstances can still make some people eligibility for a Chapter 7 discharge.
The means test only applies to people who have family income greater than the median income. In Massachusetts, the median income by family size (for cases filed after March 15, 2010):
- Family of one: $53,315
- Family of two: $69,204
- Family of three: $82,297
- Family of four: $99,293
- Add $7,500 for each additional family member (for cases filed after April 1, 2010).
However, even if the means test is inapplicable to you because your family makes less than the median, a “totality of the circumstances” abuse test still applies. This test is more vague but essentially means that if you have the ability to fund a reasonable Chapter 13 repayment plan out of your income you should do so. This common-sense nugget at the heart of the bankruptcy system states that if you can afford to pay none of your debts, you pay none of your debts, if you can afford to pay some of your debts, you pay some of your debts.
If your debts are primarily business debts, the means test triggered by median income does not apply to you. By way of example, a Massachusetts resident with a family of fout whose income is more than $99,293 would not be required to complete a means test if his or her debts are primarily the debts incurred in conjunction with some business venture.