Eligibility To File Bankruptcy Under Chapter 7 And Chapter 13

Determining whether you’re eligible to file for bankruptcy, and which type of bankruptcy you should file, depends on several factors related to your income, assets, debts, and financial goals. Below is a breakdown to help you assess your eligibility and decide which type of bankruptcy (Chapter 7 or Chapter 13) may be appropriate for you.

1. Am I Eligible to File for Bankruptcy?

There are specific eligibility criteria depending on which type of bankruptcy you’re considering. Let’s go over both Chapter 7 and Chapter 13 requirements:

Chapter 7 Bankruptcy Eligibility:

1. Means Test

• Eligibility is based on your income relative to the median income in your state. The means test is the key factor in determining whether you qualify for Chapter 7. The test looks at your average monthly income over the past six months and compares it to the state median income for a household of your size.
  • If your income is lower than the state median, you can file for Chapter 7.
  • If your income exceeds the state median, you may still qualify, but you must pass a second part of the test, which examines whether you have enough disposable income to pay off some of your debts. If your disposable income is too high, you may not qualify for Chapter 7 and might be required to file Chapter 13 instead.

1. Prior Bankruptcy Filings

• If you’ve previously filed for bankruptcy:
  • You cannot file for Chapter 7 if you have already received a discharge under Chapter 7 within the past 8 years.
  • If you have filed for Chapter 13 in the past, you must wait 6 years before filing for Chapter 7, unless you paid off all your unsecured debt or at least 70% of your debts in your prior Chapter 13 plan.

1. Property Considerations

• Chapter 7 involves the liquidation of non-exempt assets. If you have substantial assets that are not protected under exemption laws in your state, you may not want to file for Chapter 7 because you could risk losing property. However, most Chapter 7 cases are “no-asset” cases, meaning debtors can keep their property if it’s exempt.

Chapter 13 Bankruptcy Eligibility:

1. Income Requirement

• Steady income is a key factor for Chapter 13 eligibility. You need to have a reliable income source (from employment, self-employment, pension, etc.) to make monthly payments toward a repayment plan. This is because Chapter 13 requires you to repay all or part of your debt over a period of 3 to 5 years.

1. Debt Limits

• Chapter 13 is only available to individuals (and sole proprietors) who have secured debts (e.g., mortgage, car loans) of less than $1,395,875 and unsecured debts (e.g., credit cards, medical bills) of less than $465,275 (as of 2024; these limits may change). If your debts exceed these limits, you may not be eligible for Chapter 13, and you would likely need to file Chapter 11 (which is typically for businesses).

1. Prior Bankruptcy Filings

• Chapter 13 has a 2-year waiting period if you’ve previously filed for a Chapter 13 bankruptcy and had it dismissed.
  • If you filed for Chapter 7 or Chapter 13 previously, and received a discharge, you can generally file for Chapter 13 again after 4 years for Chapter 7 or 2 years for Chapter 13.

2. Which Type of Bankruptcy Should I File?

To decide whether Chapter 7 or Chapter 13 is best for your situation, you should consider several key factors about your finances:

Consider Chapter 7 Bankruptcy If:

• You have little to no disposable income: If you are living paycheck to paycheck and do not have any significant assets to protect, Chapter 7 may provide a quicker and cleaner discharge of most unsecured debts.
• Your debts are mostly unsecured (credit cards, medical bills, personal loans, etc.): Chapter 7 can discharge most unsecured debts quickly, allowing you to get a fresh start without the burden of ongoing debt.
• You don’t have substantial assets: If you own a house or car with significant equity, you may be at risk of losing them in Chapter 7 unless they are fully protected by state exemptions. But if you don’t own much property, you’re more likely to qualify and not lose anything.
• You want a relatively quick process: Chapter 7 is usually completed in 3 to 6 months, meaning you can wipe out most debts and get back on track faster.

Consider Chapter 13 Bankruptcy If:

• You have a steady income: Chapter 13 requires you to have a regular income source to make monthly payments toward your repayment plan.
• You want to keep your property: If you’re behind on your mortgage, car payments, or other secured debts and you want to avoid foreclosure or repossession, Chapter 13 allows you to catch up on missed payments over time.
• You have significant assets to protect: If you own a home or valuable property that you don’t want to lose, Chapter 13 allows you to keep your assets and avoid liquidation, as long as you make the required payments according to the repayment plan.
• Your debts exceed Chapter 7 limits: If you have more than the allowed amount of unsecured or secured debt for Chapter 7 eligibility, Chapter 13 may be your only option.
• You want to reorganize rather than discharge your debts: Chapter 13 is a good option if you can’t fully pay off your debts right now but you have the ability to make regular payments toward your debt in the future.

Scenario Examples:

• Example 1: Sarah
  Sarah has $30,000 in credit card debt and $5,000 in medical bills. She has no significant assets (no home, no car with equity), and her monthly income is low. Sarah qualifies for Chapter 7 based on her means test, and she would likely benefit from it, as her debts will be discharged in 3 to 6 months, giving her a fresh start.
• Example 2: John
  John has $60,000 in credit card debt, $25,000 in car loans, and a $200,000 mortgage on his home. He is behind on his car payments and mortgage but still has a stable income. Because he has secured debts and is behind on payments, Chapter 13 might be a better option for him. He can keep his house and car, catch up on overdue payments, and work out a repayment plan over 3 to 5 years.
• Example 3: Jessica
  Jessica has $200,000 in unsecured debt and earns a high income. After taking the means test, she discovers she does not qualify for Chapter 7 because her income is too high. Jessica may need to file for Chapter 13 bankruptcy, where she can work out a repayment plan to pay off her debts over time.

3. How to Determine Eligibility and Choose the Right Type

• Consult a Bankruptcy Attorney: A qualified bankruptcy attorney will be able to evaluate your financial situation, help you determine if you qualify for Chapter 7 or Chapter 13, and advise you on the best course of action.
• Complete the Means Test: If you’re considering Chapter 7, your attorney will help you complete the means test, which is a necessary step to determine your eligibility.
• Review Your Assets and Liabilities: Assess your assets and the types of debts you have to see if you stand to lose property in a Chapter 7 filing or if you need the flexibility and protections offered by Chapter 13.

Final Thoughts

Your decision to file for bankruptcy and choose between Chapter 7 or Chapter 13 will depend on your financial circumstances, income, debt levels, and the type of assets you own. While Chapter 7 offers a faster discharge of debts, it may not be suitable if you have valuable assets or if your income is too high. Chapter 13 offers a longer-term solution that allows you to reorganize and repay debts while protecting your property, but it requires a steady income and the ability to stick to a repayment plan for several years.

Working with an experienced bankruptcy attorney is crucial to understanding your options and navigating the bankruptcy process smoothly. They can also help you evaluate alternatives to bankruptcy, such as debt consolidation or settlement, if that might be a better option for you.