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Despite change in law, Chapter 7 bankruptcy still an option

Readers may have heard that Congress passed a law a few years ago that prevents many people from filing for bankruptcy. This is not the whole story. The law did raise the standards that an applicant must reach in order to be eligible for debt relief through the bankruptcy process. But both Chapter 7 and Chapter 13 bankruptcy remain available to many people.

The law went into effect in 2005. At the urging of the credit card companies, the new law created a two-step process to determine who qualifies for Chapter 7 bankruptcy.

This may have been an effort to funnel more people into filing for Chapter 13 bankruptcy. Chapter 7 allows people to discharge all of their debts and does not require payment to creditors. On the other hand, Chapter 13 generally involves repaying at least a portion of your unsecured debt, over a period of up to five years.

First, to qualify for Chapter 7, an applicant’s household is expected to have an income no higher than the state’s median income. As of 2014, New York State’s median income for a household of four people is $74,501. The greater the number in the household, the higher the income ceiling.

However, exceeding the median income does not automatically disqualify a household from Chapter 7. Those with higher incomes may still qualify.

To determine eligibility in these cases, it is necessary to review the household’s income and expenses. You then compare these figures against the expenses allowed by the IRS to taxpayers with a delinquent tax bill. Applicants within those allowances may be allowed to file Chapter 7.

Otherwise, Chapter 13 might be a good option. A bankruptcy attorney would be able to examine your case and explain your options.

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