Can I qualify for bankruptcy?

Once someone has decided to file bankruptcy, it is important to choose the right kind of bankruptcy to file. Anyone can file a Chapter 7 or a Chapter 13 but the case could be dismissed if the wrong kind is filed. In addition, unpleasant results could occur if the wrong decision is made.

Any person who lives in the United States can file a bankruptcy here. You have to show that the court has jurisdiction over the case. Because bankruptcy is federal law, you have to file the case in the right federal court district, such as the Western District of Washington. Sometimes you can establish jurisdiction by having property located in the district. Married couples can file a joint bankruptcy. Otherwise only individuals can file. You do not have to have legal residency in the United States to file a bankruptcy. Businesses can file bankruptcy but usually do not file a consumer case – a Chapter 7 or 13 – but an expensive and complicated Chapter 11. If a business fails, the owner may need to file a consumer case.

If someone files a Chapter 7, they have to show they are not abusing the bankruptcy system. That requires submitting to a means test to show they do not have the income to make any payments to creditors over five years. The means test looks back six months and compares that household income to the average household income in the debtor’s state. If the income is higher than average, the test deducts expenses to see if there is any money left at the end of each month available for debt payment. The means test sets out strict standards for allowing these expenses. If there is money left in the means test, a Chapter 7 debtor is presumed to be abusing the system. They can fight this presumption of abuse by claiming special circumstances, such an unusually high level of income in the six months before filing, a new baby, or unusual necessary expenses.

Though a debtors property in a Chapter 7 is usually exempt from being taken to pay debt, there are cases where property can be taken over by a trustee for sale to pay creditors. This issue should be explored thorough before filing a Chapter 7. Once a Chapter 7 case is filed and there is a finding of assets, a debtor may not be allowed out of the case.

A debtor who is worried about losing property can file a Chapter 13 to pay creditors with monthly payments rather than paying them with the sale of property. Debtors can avoid a finding of abuse of the system by filing a Chapter 13. You can only file one Chapter 7 with a discharge every 8 years but after 4 years you can file a Chapter 13 and get a discharge. It is much easier to qualify for a Chapter 13 than a Chapter 7, but you have to show your plan is “feasible” – that you have enough income to make the monthly payments. There are limits to how much debt you can have in a Chapter 13 too. The amounts change slightly from time to time but the limits are approximately $1,000,000 in secured debt and $350,000 in unsecured debt. If you can succeed in a Chapter 7 or a Chapter 13, your option is an expensive and complicated Chapter 11, which is usually reserved for businesses.