Written by attorney Dorothy G Bunce

The “Good Faith” Test - The Only thing you need to know about qualifying for Chapter 7 Bankruptcy.

While it is true that bankruptcy can be complicated, for someone who just wants to know if they can qualify to file Chapter 7 Bankruptcy to eliminate the most common types of debts (credit cards, medical bills, personal loans, payday loans, vehicle repo fees), there is really only one thing you need to know. And that is “How much money do you have leftover EACH MONTH after paying just your necessary living expenses?" Once you get that number, take it and multiply it by 60. That represents the total amount of how much you could pay if you diligently tried to pay your debts for five years. If that total amount is less than ¼ of all your debts, then you probably will qualify to file a Chapter 7.

If division isn’t your strongest skill, and mine never was, an alternate way to perform the calculations is to take that original MONTHLY amount of money left over and multiply that amount by 60. Then multiply it again by 4. (Or just multiple by 240 to perform a single calculation.) If that result is less than the total of all your debts you can eliminate in bankruptcy, you probably qualify to file Chapter 7.

But if the mathematical total is more than your total debts, filing a Chapter 7 bankruptcy in this instance may be found to be NOT TO BE “in good faith."

What does this mean in real dollars and cents? Based on the CURRENT INCOME (not the average income), if $100 is left in the monthly budget after paying for just necessary living expenses, in 60 months a debtor, could have paid $6,000 towards the unsecured debts. A Chapter 7 bankruptcy would only be considered to be filed “in good faith" if the total of the unsecured debts that are eliminated are more than $24,000. Less than that amount of debt and the case can be considered to NOT be filed in good faith. The reason is that $6,000 is ¼ of $24,000. Or, if you multiply $6,000 by 4, it equals $24,000. If the total unsecured debt to be eliminated by the bankruptcy is less than $24,000, filing a Chapter 7 in this scenario may make a person vulnerable to a claim that the bankruptcy hasn’t been filed “in good faith" and should either be dismissed or converted to a Chapter 13. And paying unsecured creditors 25% of the amount owed in a Chapter 13 is considered as a successful debt repayment effort.

Because Bankruptcy laws do not actually specify that someone must owe a specific minimum amount to file Chapter 7, even many attorneys do not realize that they meet this criterion for their client to be eligible to obtain Chapter 7 relief. There has not been much publicity about the “good faith" requirement to file bankruptcy. If the amount of debt is fairly modest, bankruptcy may not be the right choice for someone who does not meet this "good faith." standard to qualify to file Chapter 7 bankruptcy.

Even though all the bankruptcy buzz focuses on the “Means Test" and the “Median income charts" based on the size of the household, these requirements are usually a distraction. Most people represented by an experienced bankruptcy attorney can pass the Means Test with a modest amount of financial advice. But my experience is that it is much more common that someone cannot pass this “good faith" test unless the amount of their debt is truly massive. In fact, I find that potential clients are far more likely to fail the "good faith test" even if they easily pass the Means Test.

Usually, if the total unsecured debt eligible to be eliminated in a Chapter 7 is less than 40% of the household's annual income, the bankruptcy system (meaning the office of the US Trustee) will expect a person to make an effort to pay some of their debt in Chapter 13 instead of eliminating it in a Chapter 7.

Realistically though, for someone wishing to file bankruptcy without legal representation, the bigger problem is "What are necessary living expenses?" How much can you claim for entertainment expenses? What is necessary for clothing, groceries, gasoline? Can you keep your cell phone? Your cable tv package with all of the premium channels? Are your kids going to private schools or are you paying for them to go to college? What about the cost of birthday and other holiday gifts? What is the limitation on charitable donations of cash or tithing? Only an experienced bankruptcy attorney will be familiar with the limitations of what is considered to be a necessary expense, and those numbers vary widely throughout the United States.

If an attorney develops a reputation for filing Chapter 7 cases that fail to meet the requirement of “good faith," his/her career as a bankruptcy attorney may become a nightmare. This is because the office of the United States Trustee can be relentless in examining each and every case this attorney files in the future. This examination process can make it completely unprofitable for the attorney to remain in the bankruptcy field as the UST can easily add 5 or more hours of work to each case the attorney prepares. Still some attorneys, like some clients, simply have to learn the hard way!

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