Can I Qualify?

In general, any person or business can file for bankruptcy. Businesses can not get a discharge in Chapter 7, but sometimes a business will file a Chapter 7 to allow a trustee to liquidate the business assets so the owners do not have to. If there are no business assets, it makes no sense to file a Chapter 7 – the business is simply dead and can not pay any debts. Most creditors require business owners to accept personal liability for business debts, which can be discharged in a personal bankruptcy after the business closes. Businesses that are in trouble and want to stay open usually have to file a Chapter 11.

The two kinds of consumer bankruptcy are Chapter 7 and Chapter 13. To file a bankruptcy you have to take a credit counseling class within 180 days of filing. This class lasts only two hours, can be taken on line and is fairly cheap. You can only file one Chapter 7 with a discharge every eight years. You can not get a discharge in a Chapter 13 filed within four years of a Chapter 7. The only people who can file bankruptcy together are married couples. Otherwise, anyone can file a Chapter 7 but you may later be disqualified if your income is too high and it is determined that you are abusing the bankruptcy system.

To determine whether a Chapter 7 debtor is abusing the bankruptcy system, you have to complete a “means test.” The means test looks at the income over the past six months. If that income is over the median income for the state and the debtor’s household size, a means test has to be filled out. The means test takes that income and deducts monthly expenses to determine whether the debtor should have some money left in the budget to at least pay some debt back. The means test deducts mortgage payments, health insurance, day care and other actual expenses and also deducts some expenses that are defined by the IRS tax repayment regulations, such as food, clothes, transportation and rent. If someone files a Chapter 7 and there is disposable income left after going through the means test, there is a presumption of abuse. This presumption can be overcome by citing special circumstances. Of course, basing your ability to pay debt by only looking back six months and basing your future ability to pay debts is not always going to work.

To qualify for a Chapter 13, you have to be able to propose a feasible plan. That means you need the income to fund it. If a debtor does not have the money to get caught up on a mortgage within five years, the plan may be deemed unfeasible. In some rare cases people have some property, such as a piece of real estate that is not a residence, that they do not want to lose in a Chapter 7. It can be protected in a Chapter 13 but only if the plan can pay the “liquidation value” of the property. For example, if a person inherited part of a vacation home with their brothers and sisters, and their share is $60,000 and they have no wild card exemption left to cover it, he or she can file bankruptcy and protect that property (and avoid problems with their siblings) if they can pay $1,000 per month for five years to cover what the creditors would get from the sale of that property. If this person just doesn’t have $1,000 per month to pay, he or she can’t file a feasible plan.

There are debt limits in Chapter 13 as well. If the debtor has over $1,081,400 in secured debt or $360,475 in unsecured debt the debt limit has been exceeded and the debtor has to file a Chapter 11. This form of bankruptcy is very expense. There are no debt limits for Chapter 7.