Among the eligibility requirements to file a Chapter 7 Bankruptcy, the Means Test is used to determine whether or not a debtor has the resources available to satisfy their financial obligations. When a debtor fails to satisfy the requirements of the Means Test, they have the option of filing a Chapter 13 bankruptcy instead. However, there are exceptions to the Means Test which provide certain debtors the option of filing a Chapter 7 bankruptcy despite having too high of income. If the majority of your debts are non-consumer debts, you are a disabled veteran, or you are a military Reservists/Guardsmen, you may qualify for Chapter 7 bankruptcy regardless of your income.
Non-Consumer Debts
When it comes to Chapter 7 Bankruptcy, the majority of our clients have consumer debts. When this is the case, we meticulously apply the Means Test to their case to make sure their financial situation satisfies the requirements to file. However, on occasion, we have clients who come to us as a result of overwhelming non-consumer debt. Non-consumer debt, most often, refers to debts incurred from operating a business.
In order to qualify for the non-consumer debt exception to the Means Test, your non-consumer debt must be more than 50% of your overall debt. This can be tricky sometimes for home owners. If you have a house subject to a mortgage, and the mortgage is enough to make your overall consumer debt exceed non-consumer debt, then you will not qualify for this exception. Unless, of course, your mortgage is in the name of your business. Despite the infrequency of this exception being used, this is a great option for certain debtors who need to break free from an unsuccessful business venture.
Disabled Veteran
Some practitioners believe the disabled veteran exception to the Chapter 7 Means Test applies simply by virtue of the debtor receiving VA disability. Well, this simply isn’t true. The Bankruptcy Code is much more specific when it comes to outlining the requirements for this exception. There is a two-part test in which a debtor must satisfy before being eligible for this exception: VA disability rating must be 30% or greater; and the debts must have been incurred while serving on active duty, or in support of homeland defense activities.
According to Title 10, “active duty refers to full-time duty in the active military service of the United States. Full-time includes training duty, annual training duty, and attendance, while in the active military service, at a school designated as a service school by law or by the Secretary of the military department concerned. Such term does not include full-time National Guard duty.”
Homeland defense activities, according to 32 U.S.C. 901(1), is construed slightly different. According to the statute, “the term “homeland defense activity” means an activity undertaken for the military protection of the territory or domestic population of the United States, or of infrastructure or other assets of the United States determined by the Secretary of Defense as being critical to national security, from a threat or aggression against the United States.”
If you believe you may be eligible to avoid application of the Means Test because you are a disabled veteran, please contact our office. As a fellow servicemember, I would be proud to serve you through the bankruptcy process.
Military Reservist/Guardsmen
In order to qualify for this exception, military Reservists and Guardsmen must satisfy specific requirements, as well. The exception applies to members of the military Reserve or National Guard so long as they were on active duty for at least ninety (90) days. Additionally, the exception only applies for the 540 days after being discharged from active duty. So, if a Reservist or Guardsman waits more than 540 days, then it is too late to qualify for this exception in Chapter 7 bankruptcy.
It is important to know about the 540 day exception in advance. Ok, I know, if you aren’t aware of it, how do you know to ask? Well, this is one of the reasons it’s important to be proactive when it comes to your bankruptcy case. After your case is filed, your creditors have a time limit in which they must object to your discharge. If the time passes, and there is no objection, then you will likely receive your discharge. However, if the 540 day time limit expires before the creditors time for objection expires, you will have to take and pass the Means Test to qualify for a Chapter 7 discharge.
Good Faith Requirement
Construed broadly, the Good Faith Requirement is pretty straight forward. As the saying goes in bankruptcy, the honest debtor receives a discharge. With that said, it is important to be honest during the entire bankruptcy process. The easiest way to be denied a discharge is by being dishonest. When it comes to the aforementioned Means Test exceptions, the Good Faith Requirement applies more so to your monthly budget. Another part of qualifying for Chapter 7 Bankruptcy is proving to the court you have a financial need to file a Chapter 7. This is accomplished in a number of ways, but most easily by showing you have little to no discretionary income left over after paying your monthly expenses.
If someone who makes $200,000 a year wants to file a Chapter 7 bankruptcy by employing the Non-Consumer Debt Exception, we must also prove that same individual does not have discretionary income after satisfying his/her monthly expenses. If the budget show there is $300 of discretionary income left over at the end of the month, we will not be able to satisfy the Good Faith Requirement and this individual will have to file a Chapter 13 bankruptcy, if they wish to be discharged of their debts.
Closing Thoughts
Chapter 7 Bankruptcy is a great option for many people suffering from overwhelming debts. Even more so, Chapter 7 is a great option for people who are strapped down by non-consumer obligations or incurred their debts while defending our country. If you have questions about bankruptcy, please feel free to give us a call. At Kain & Scott, we’re honored to serve you.
