If you are overwhelmed with debt and feel that it’s impossible to ever pay it all back with your current income, you may be considering bankruptcy.
There are two types of bankruptcy:
Chapter 7, also known as straight bankruptcy or liquidation, is the type which clears the filer of all qualified debts. Chapter 7 filers must meet certain income criteria.
Chapter 13, also known as a reorganization or payment plan bankruptcy, is a court-ordered structured repayment plan in which the filer can keep most of their property. Chapter 13 is available to borrowers of any income level.
Let's look at eligibility requirements for each type of bankruptcy:
Previous Bankruptcy?
If you’ve filed bankruptcy before, there are time limits on how soon you can file for a next bankruptcy. The time starts on the filing date of the prior bankruptcy.
- Prior Chapter 7 filers must wait eight years to file Chapter 7 again.
- Prior Chapter 7 filers must wait four years to file Chapter 13.
- Prior Chapter 13 filers must wait two years to file Chapter 13 again.
- No mandatory wait period for prior Chapter 13 filers who have paid 100% of their reorganized debt
Means test
In updating the bankruptcy code in 2005, Congress added the “means test” to prevent high-income earners from having all their debts wiped out with Chapter 7.
Passing the means test is the first step towards eligibility for Chapter 7 bankruptcy filing. If your current monthly income falls below the median income in your state for a household of your size, you automatically pass the means test.
If your income is slightly above the median, there’s a possibility that you still pass the means test and qualify for Chapter 7 if your expenses monthly expenses are very high and you have little disposable income to pay towards your debts. Consult a bankruptcy attorney who can do the calculations for you.
If you do not qualify under the Chapter 7 means test, you can only file Chapter 13. And even if you qualify for Chapter 7, it doesn’t mean that’s the better choice for you - especially if you want to keep your property and can make payments towards your debts.
Mandatory counseling
Bankruptcy law changes also made it mandatory for all bankruptcy filers to attend courses to help debtors manages their finances better the next time around and prevent another bankruptcy down the road.
Bankruptcy filers must an approved credit counseling within the 180 days prior to filing. The counseling can be either individual or group sessions.
After filing and before your debts can be discharged, you must also attend a debtor education course.
The mandatory credit counseling and debtor education course must be approved by the Department of Justice's U.S. Trustee Program.
In Alabama and North Carolina, court officials called Bankruptcy Administrators approve
pre-bankruptcy credit counseling organizations and pre-discharge debtor education course providers.
This article is for general informational purposes only and is not intended to replace proper legal counsel. Please consult a bankruptcy attorney familiar with the laws in your state.
Sources:
U.S. Bankruptcy Courts