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Colorado residents: do you qualify for Chapter 7?

When Colorado residents are facing financial challenges, they may question what options they have for debt relief. For example, while Chapter 7 bankruptcy can provide a fresh financial start, some may not know whether they qualify for Chapter 7.

It used to be the case that bankruptcy judges had a great deal of discretion in deciding whether someone qualified for Chapter 7. The law was changed years ago in order to weed out those who can afford to repay debt under Chapter 13. Accordingly, individuals must now satisfy certain requirements in order to be eligible for Chapter 7.

One requirement pertains to a person's income. If the level of income is too high, which is judged by a means test, the person is ineligible for Chapter 7. The means test looks at a person's monthly income from multiple sources, and compares it with the state's median income. The person's income must be equal to or below the state's median in order to qualify.

However, if the person's income is higher than the median income, it does not mean the person is automatically ineligible. Rather, the person must then pass a second test that looks at whether the person has disposable income left in order to repay some creditors. If this is the case, a Chapter 13 bankruptcy may be more appropriate.

Despite the income requirement, many individuals will qualify for Chapter 7's protections. For instance, a mayor of a town recently filed for Chapter 7 bankruptcy after his business lost significant revenue during the recession. The mayor had a salary of $67,000, aside from his business income. Assuming he qualifies, the mayor can get a discharge of most debt under Chapter 7, including the credit debt he and his wife built up after the business got in trouble.

The income test is just one factor that is looked at in terms of deciding eligibility, as other factors are considered, such as whether the person previously discharged debt in bankruptcy. Ultimately, a qualified bankruptcy attorney can help a person determine whether they qualify for Chapter 7, and how to begin the process toward debt relief.

Source: NBC 15, "Stevens Point Mayor files for bankruptcy," Mar. 10, 2013

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