Six Ways to Qualify for Chapter 7 Bankruptcy (Even If You Think You Can’t)
by Luke Homen
Video Transcript:
Six Ways to Qualify for Chapter 7 Bankruptcy – Luke Homen Episode 7
What is the most common way to qualify for Chapter 7 bankruptcy?
Luke Homen explained that the most common path to Chapter 7 eligibility is through the median income test. Each state publishes income limits based on family size, updated twice a year using government statistics. If an individual or family earns less than the median income for their household size in their state, they automatically qualify for Chapter 7 without further questions. Luke noted that the larger the family, the higher the income allowance, since more dependents require greater resources.
How does the bankruptcy means test determine eligibility?
According to Luke, the means test is a detailed, 12-page worksheet designed to show what disposable income truly remains after accounting for allowable expenses. While gross income may look high on paper, the means test adjusts for real-world factors like rent, childcare, health insurance, prescription costs, taxes, and car or mortgage payments. Some numbers are drawn from IRS tables, while others are based on actual expenses. By calculating net income instead of gross, many people who initially appear ineligible under the median income test still qualify for Chapter 7 through the means test.
Are there any exemptions from the means test?
Luke explained that a very narrow exemption exists for certain service members and victims of war crimes. For example, a deployed service member who incurred all their debt while actively serving could be exempt from the means test. However, he noted these exemptions are extremely rare in practice and almost never apply to the average bankruptcy filer.
Can someone convert from Chapter 13 bankruptcy to Chapter 7?
Yes. Luke shared that it is common for individuals to begin in Chapter 13 and later convert to Chapter 7 when life circumstances change. For example, someone might initially earn too much to qualify for Chapter 7 and commit to a five-year repayment plan under Chapter 13. But if they later lose income, adopt children, or face other significant financial changes, they can request a conversion. This flexibility allows debtors to shift into Chapter 7 once they become eligible, rather than remaining locked into a plan they can no longer afford.
Why would someone file Chapter 7 bankruptcy under a presumption of abuse?
Luke described filing under presumption of abuse as one of the most misunderstood but important strategies. While bankruptcy typically relies on formulas and income tests, some cases require telling the debtor’s unique story. For example, a client may have unusual expenses not reflected in the means test, such as rural living costs or upcoming major expenses like a car replacement. Another example is someone who recently lost a high-paying job and has no income, even though past income records suggest otherwise. In these situations, attorneys can present the debtor’s circumstances to show why Chapter 7 relief is appropriate despite failing the standard tests.
What does “rebutting presumption of abuse” mean in bankruptcy cases?
Luke explained that the bankruptcy code creates an automatic assumption that debtors are not abusing the system. However, when a case is flagged for presumption of abuse, the burden shifts to the debtor and their attorney to prove eligibility. This may involve presenting evidence of job loss, medical conditions, or unusual expenses to demonstrate that the filer truly cannot afford to repay debts. In practice, Luke said these cases often involve direct communication with the U.S. Trustee’s office and providing a clear narrative at the 341 meeting of creditors to explain the debtor’s situation.
Can business debt or tax debt allow someone to bypass the means test?
Yes. Luke clarified that the means test only applies when the majority of a filer’s debt is consumer debt, such as credit cards or personal loans. If most of the debt comes from a failed business or from tax liabilities, then the means test does not apply. In these cases, bankruptcy courts focus instead on the debtor’s overall financial picture. Luke noted that this exemption has been particularly useful for clients with significant business obligations or large tax debts, both of which can sometimes be discharged in Chapter 7.
Why do many people mistakenly believe they don’t qualify for Chapter 7?
According to Luke, many individuals rule themselves out after doing a quick internet search or speaking with an inexperienced general practice attorney. Because the rules are complex and involve multiple paths to eligibility, people often assume they cannot qualify when, in fact, an experienced bankruptcy lawyer may find a viable strategy. Luke emphasized the importance of consulting a dedicated bankruptcy attorney who understands the nuances of each path.
What advice does Luke Homen give to people who feel stuck in debt?
Luke encouraged anyone overwhelmed by debt to consult with an experienced bankruptcy attorney and share their full financial story. He stressed that every case is unique, and there are often more options than people realize. By scheduling a consultation and providing detailed information, individuals can discover whether one of the six Chapter 7 pathways may apply to them and take steps toward financial relief.
Attorney Luke Homen is the President of Convenient Bankruptcy. He places great value on helping individuals and families solve their financial challenges and achieve real financial freedom. His goal is to find a customized solution that fits each client’s unique situation. Luke has been practicing law since 2008, and was voted “Best Bankruptcy Attorney in Oklahoma” by The Oklahoman in the Reader’s Choice Awards.
