You know you need to file bankruptcy. But you are not sure if you qualify or are eligible to file.
The good news is that nearly everyone qualifies to file under SOME bankruptcy chapter.
So the questions become: Which Chapter do I qualify for and which is best for me to accomplish my goals?
Each bankruptcy chapter has different qualification requirements and different costs and benefits.
Here is a quick summary of the various chapters and what they mean:
Chapter 7: No payments made by you to creditors. You get rid of all dischargeable debts* in return for giving up any non-exempt assets you have. Most ordinary household assets are exempt (i.e. protected), but if you have a lot of cash assets, or a lot of equity in your house, they may be at risk.
Chapter 13: Payments made to creditors for 36-60 months based on your budget. You get to keep all assets, but must pay out at least the value of non-exempt assets over that period. [pullquote]Learn more about the different bankruptcy chapters [/pullquote]
Chapter 11: Same as Chapter 13 except that there is more flexibility on the length of payments. However, Chapter 11 is much more involved (in terms of paperwork and ongoing administrative obligations) and costs a lot more (in terms of court costs and attorney’s fees).
* Not all debts can are dischargeable. For example, domestic support obligations, taxes less than 3 years old, debts incurred through fraud, and others are not dischargeable.
Qualification Requirements for All Bankruptcy Chapters
The first requirement is that you must be a person–presumably human–although that is not specified in The Bankruptcy Code.
Pursuant to 11 U.S.C. §109, in the United States the basic requirement to be a debtor is that you must reside, have a domicile, place of business, OR some property in the United States.
Oh, and “person,” is defined to include individuals, partnerships and corporations (which apparently partially explains how corporations can have free speech).
Each chapter of bankruptcy has its own threshold eligibility requirements.
Chapter 7 Bankruptcy Eligibility
There are several tests to determining eligibility for Chapter 7. It depends in part on whether your debts are primarily consumer or nonconsumer, your income, and your expenses.
If your total debts are primarily nonconsumer (not incurred for a personal, family, or household use), then there are no income eligibility requirements for Chapter 7.
The Means Test-(only if your debts are primarily consumer debts).
This is a complex test which looks at ALL income received in the six calendar months prior to filing your bankruptcy case, and then subtracts from it what the IRS considers appropriate living expenses for your region. You are also allowed to subtract other expenses such as mortgage and car payments.
If your gross income for that period and your household size is less than the median income for your State, then you don’t even need to do the means test, and you can move on to the next budget test. [pullquote] Learn more about the means test[/pullquote]
If your income is above the median, then you must proceed through the means test subtracting out the allowed expenses. If the resulting amount shows an ability to pay your debts (as defined by Congress, not reality), then a “presumption of abuse” arises and you may not be eligible for Chapter 7 relief.
Depending on your particular facts, your attorney can argue that the presumption should be ignored in your particular case.
The Current Budget Test
[pullquote] More Information On Chapter 7[/pullquote]
In addition to the means test, the courts will look at your budget on the date your bankruptcy case is filed (which can be quite different than the prior 6 months used on the means test) and your actual “necessary living expenses”. Thus, not all expenses are allowed.
For example, if your food budget includes dining out at the fanciest restaurants several times a week and you are spending $3,000 per month for a family of 2, that is not going to be allowed.
If your budget shows a significant surplus (as ultimately decided by the court), then you may not be eligible for Chapter 7 relief.
Your bankruptcy attorney will play an important rule in presenting your budget and arguing for acceptance of necessary expenses.
Chapter 13 Bankruptcy Eligibility
Chapter 13 uses a tests similar to the Chapter 7, but it is not used for eligibility–it is used to determine what the minimum monthly payment must be in the Chapter 13 Plan.
The eligibility requirements are the following:
You must be an individual to file Chapter 13.
I’m not talking about your personality here. Corporations and partnerships cannot file Chapter 13.
Chapter 13 Debt Limits
You must have less than $394,725 of unsecured debt and less than $1,184,200 of secured debt. (These numbers increase every few years)
Junior mortgage liens may apply to unsecured debt if they are “under water” (i.e. if the amount owed to senior mortgages/liens is less than the fair market value of the property) [pullquote] More Information On Chapter 13[/pullquote]
You Must Have “Regular” Income in Chapter 13.
Chapter 13 is designed for people with regular income. This includes unemployment income, pensions, social security and self-employment income, but you must be able to prove that your average income is “regular”. Third party contributions (e.g. family or friends) can count as regular income.
Those are the basic threshold eligibility requirements. Of course, you must also propose a repayment plan and have it approved by the court, and there are many requirements for the Plan.
Chapter 11 Bankruptcy Eligibility
Almost anybody can file a Chapter 11 case. Even corporations and partnerships.
Who can’t file Chapter 11? Municipalities (Chapter 9) and Family Farmers (Chapter 12)
Chapter 11 was originally designed for large businesses, but anyone can file. [pullquote] More Information On Chapter 11[/pullquote]
There are no minimum debt or income requirements. However, as a practical matter, since Chapter 11 is very involved and expensive it is typically only used by people or businesses who have a lot of non-exempt assets or income and who cannot qualify for Chapter 13.
Eligibility Does Not Equal Discharge
The above are initial eligibility requirements to obtain relief under the above Chapters. It does NOT discuss the requirements for obtaining a discharge of debts under the various chapters.
For example, you may be eligible to file a Chapter 7 case, but ineligible to receive a discharge if you received a discharge in a prior Chapter 7 case filed within 8 years of the “new” case.
[pullquote] timing for discharge between bankruptcy chapters[/pullquote]
Always Consult First With A Bankruptcy Specialist
As you can see, there are a lot of nuances and tricks to qualifying for the various bankruptcy chapters. It is important to understand the risks and benefits of each bankruptcy chapter first before deciding which one you qualify for and wish to file under.
A consultation with an experienced and qualified bankruptcy attorney will reveal your eligibility, options, and the costs and benefits for each. Armed with that information you will know your options and get make a better decision on how to proceed to deal with your debt issues.
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