Chapter 7

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Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is also known as a "fresh start" bankruptcy because it completely wipes out a majority of, if not all, debts. Certain debts are not dischargeable under the Code, which includes child support, certain taxes, government and court fines, student loans, and certain criminal restitution. Debts incurred by fraud are never dischargeable. Almost everything else is fair game.

To qualify to file a Chapter 7, the petitioner (also known as the "debtor") must show that his or her income is less than the "median income" of other people in the State of Washington. As of March 15, 2011, the U.S. Department of Justice's publication indicates the median income for a Washington household of one is $49,930 (subject to change). An individual (in a one-person household), whose total gross income is less than $49,930, can presumably file a Chapter 7 without additional calculation.

For people whose income is over the median income, there might still be hope. They still might qualify because the Bankruptcy Code provides a lengthy and complicated calculation that involves standardized deductions (with some adjustments). The calculation takes into account secured debt payments and other special circumstances (like child support payments) that might better describe the petitioner's financial condition.

Lastly, the petitioner must also demonstrate that he or she cannot pay the debt as they become due. To show this, the petitioner must file a budget sheet (known as Schedule I and Schedule J) with the bankruptcy court. The budget must show that the petitioner has very little money left over at the end of each month.

Thus, it is possible for someone who makes $15,000 per year to not qualify to file a Chapter 7 without raising a red flag because this person lives at home with parents who pay for everything. This is because this person would have too much excess money at the end of each month. But it is also possible for someone who makes $60,000 per year (which is more than the median income) to still qualify if he/she spends $15,500 per year on child support payment.

To this end, qualifying to file a Chapter 7 is not so black-and-white. However, it can be a bitter-sweet experience to file. The process naturally causes anxiety and stress, as with most legal proceedings. The end result is a discharge of debts, which prevents old creditors from ever legally collecting from the petitioner. This is a permanent end to the harassments, lawsuits, garnishment, etc.