Do You Qualify to File Chapter 7 or Chapter 13?

As you start thinking about filing bankruptcy, you might be quite clear about wanting to file a “straight” Chapter 7 bankruptcy or instead a Chapter 13 “adjustment of debts.”  Sometimes the choice between them can be quite straightforward.  But other times it’s a tougher call. There could very well be unexpected advantages with the option that you were NOT intending to use, or unexpected disadvantages with your initial choice.  There may be a number of unexpected factors to weigh in deciding whether Chapter 7 or 13 is truly the best for you. So it’s smart to have an open mind about this when you first meet with an attorney.

The sensible place to start is to determine which Chapter you are eligible to file.

Eligibility depends on the following four considerations:

A) Who Can File a Bankruptcy:

Although this may sound obvious, if you are an “individual”-a human being-you are eligible to file either a Chapter 7 case or a Chapter 13 one.

In contrast, if you are an owner of a corporation or a business partnership (or LLC or the other legal business forms) and you are considering filing bankruptcy in that business’ name, that corporation or other business entity is eligible to file a Chapter 7 case, but NOT a Chapter 13 one. The business can file its own Chapter 7 case, and you may or may not need also to file a Chapter 7 or 13 individually.

You can file a personal bankruptcy either by yourself or in a “joint case” with your spouse.

B) Type of Debt and Amount of Debt:

If more than half of the debt that you owe (by dollar amount) is “consumer debts”-defined as “incurred by an individual primarily for a personal, family or household purpose”-then to be eligible for Chapter 7 you have to pass the “means test.”   (See below.)  If at least 51% of your debt is non-consumer debt then you are not required to pass the “means test”. It is important that a qualified attorney review the types of debts you have to determine if they qualify as non-consumer debt. Items such as income taxes, business debts and automobile accident debts are non-consumer debts.

Chapter 13 has limits on the amounts of unsecured and secured debt you may have to file. If you owe more than $360,475 in unsecured debts or $1,081,400 in secured debts then you cannot file for Chapter 13 bankruptcy protection. Debts that are contingent or unliquidated are not counted toward these amounts. Some debts that appear to be secured may actually be treated by some courts as unsecured or vice versa.

There is no amount of debt that is required to file for Chapter 7 bankruptcy or a limit on the amount of debt. The amount of debt that you have does not help you qualify for Chapter 7 bankruptcy. The type of debt you have may help you qualify for Chapter 7 bankruptcy.  There is an incorrect assumption that the amount of debt helps you qualify  for a Chapter 7 bankruptcy.

C) 6 Month Income:

The “means test” in Chapter 7 is a multi-step procedure, but the majority of debtors pass the test, making them eligible to file Chapter 7, if their income is no more than the published “median income” for their family size in the state in which they reside, For cases filed starting on May 1, 2012, the median income amounts in California are:

* Add $7,500 for each additional personIn Chapter 13, if your income is less than the applicable “median income” amount, then your payment plan will usually last three years. But if your income is the equal to or more than that amount, your plan will last five years.  Keep in mind that in certain circumstances a below median income debtor may need to commit to a 5 year plan due to feasibility issues or other issues.

D)  Monthly Expenses:

Even if you are not immediately eligible to file a Chapter 7 case because your income is larger than the applicable “median income” amount, you may still be able to pass the “means test” based on your expenses. The means test examines whether you have enough disposable income to pay a portion of your unsecured creditors after paying the allowed expenses.

In addition, if you have expenses that are higher than the “allowed” expenses than you may be able to still qualify to file for Chapter 7 bankruptcy. You may be able to establish special circumstances in which the additional expenses are necessary and reasonable for the health and welfare of you and your family.

In a Chapter 13 bankruptcy your monthly payment amount is generally determined by looking at the means test calculation but also factors in special circumstances that may warrant a lower plan payment.

E) Prior Bankruptcy

There IS one more eligibility consideration: Whether you have filed another bankruptcy case in the past. If you have ever filed another bankruptcy case of any kind, whether or not it was successful, please inform your attorney right away.  A prior bankruptcy filing may affect your eligibility to obtain a discharge or may affect when you can refile your case if it was dismissed with a bar.