People in a variety of situations may find themselves in need of bankruptcy relief. For some, unexpected job loss may push them into financial insolvency. For others, bankruptcy might be the result of major medical issues, such as cancer.
There are several different types of bankruptcy available for people in various different situations. Chapter 7 bankruptcy is the fastest path to the discharge of eligible unsecured debts. However, not everyone qualifies for Chapter 7 bankruptcy. How can an individual facing financial hardship determine whether they are eligible for a Chapter 7 bankruptcy filing or not?
Filers must pass a means test
The main restriction imposed on Chapter 7 bankruptcy filings relates to personal income. The person hoping to file must perform and pass a means test. They calculate their annual income based on what they have earned over the last six months. They adjust it for certain expenses and then compare that income to the state median income for a household of the same size.
In late 2024, filers in California living on their own must establish an income below $74,007 to qualify. Those in a two-person household could qualify with less than $97,073 in income. If there are three people in the household, the limit increases to $109,312. Those in four-person households can qualify with income under $127,096. Larger families can add another $9,900 for each additional individual.
Provided that their income is below the median that applies, they may be eligible for a Chapter 7 bankruptcy. It can be somewhat difficult for people to adjust their own incomes during the means testing process.
Filers also have to consider how much property they own and what they can protect with bankruptcy exemptions. There are rules that allow people to avoid the liquidation of their most valuable assets, including home equity and retirement savings. Prospective filers often need help reviewing their resources to ensure that a Chapter 7 filing is a reasonable solution given their current situation.
Individuals considering Chapter 7 bankruptcy may need to discuss their circumstances with someone familiar with bankruptcy rules and the court process required by bankruptcy. Getting appropriate support as early as possible can help people validate their eligibility for bankruptcy and take control of their financial circumstances before the situation becomes any worse.