Determining Eligibility for Filing Bankruptcy
Most individuals derive the greatest benefits by filing Chapter 7, provided that they can qualify. Unlike Chapter 13, there is no limit to how much debt you may have to be eligible for Chapter 7. Determining which Chapter of bankruptcy you are eligible to file under requires taking the Means Test, as well as calculating how much debt you owe. You may have your choice of whether to file under Chapter 7 or 13, or you may be restricted to only one or the other, or (in rare cases) you may qualify for neither.
What is the Means Test?
The Means Test was put in place by the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It consists of some simple calculations. In terms of qualifying for bankruptcy, it is a test that you want to fail, rather than pass! If you fail the Means Test, it shows that you don’t have the means to pay your debts, and so you qualify for filing bankruptcy.
The Means Test is in two parts. The first part is calculating your monthly income, and comparing it to your state’s median. The second part of the Means Test (which is not always required, if you qualified under the first part) looks not only at your income but at your expenses, to see whether your cash flow could handle repaying the debts that you owe.
The Means Test is used to see if you qualify for Chapter 7 bankruptcy, or whether you can afford a repayment plan set out through Chapter 13 bankruptcy. How the test works, and whether you may be exempt from having to pass it, are all explained in a separate article about the Means Test.
Qualifying for Chapter 7 through the Means Test
The big thing that the Bankruptcy Court wants to see in people filing Chapter 7 is that the filer is not trying to abuse the bankruptcy system by getting out of debts that they actually can afford to pay. The Means Test is your way to prove to the government that you really do not have the means to pay all of your debts, and that your only option is filing for Chapter 7 bankruptcy.
If your income is below your appropriate state’s median (adjusting for number of wage-earners and number of dependents), you automatically qualify to file Chapter 7, and do not have to proceed any further.
If your income is above the appropriate state median, then you still may qualify to file Chapter 7 through the second part of the Means Test - you just have to do a bit more work to prove to the court that you do not have the means to pay. This involves accounting for not only your income, but also your monthly expenses, to show that your cash flow is not high enough to cover paying off your debts.
Even if you pass the Means Test, the courts do have the right to dismiss your petition because of the good faith requirement. If your income is high enough that your budget could be adjusted to be able to pay a portion of your debts, the courts might rule that you are not acting in good faith and disqualify you from filing Chapter 7.
There are strict rules about what qualifies as income and what does not, how to calculate income if you are married, as well as which expenses are considered necessary. And in some cases, debtors are exempt from having to take the Means Test at all, and are automatically qualified to file Chapter 7. Exactly how to do the calculations and find the appropriate forms is all explained in our separate article about the Means Test.
Filing under “presumption of abuse”
Note that, even if you do not qualify to file Chapter 7 through the Means Test, you do have the right to file Chapter 7 anyway. However, filing in this way is what is known as filing under a “presumption of abuse.” It means that, on paper, it appears that you do have the means to be able to repay your debts, and should be filing under Chapter 13 (or not at all).
Filing under the presumption of abuse means that the court and the trustee will be paying very close attention to your case, because it appears that you do have enough disposable income to make payments under Chapter 13. You will have to be prepared to provide a detailed explanation along with documentation to demonstrate why your situation is special, and why you should be allowed to file under Chapter 7.
Qualifying for your Chapter 13 plan via the Means Test
Chapter 13, remember, means coming up with a repayment plan, to catch up on any missed payments over the next five years. This means that your income must be high enough that you can actually afford to make the payments required by that plan.
The Means Test is used to calculate what you can afford.
If your income is not high enough to make the repayments that the Chapter 13 plan requires, you will not be able to qualify for that plan. This means that, even though you would like to keep both your home and your car, if you cannot afford the payments that the plan would require, you may be required to sell one or the other in order to go ahead with Chapter 13 bankruptcy.
Debt limits for filing Chapter 13
To qualify for Chapter 13, your total debt must be within certain limits. In 2015, those limits were a maximum of $1,184,200 in secured debt (e.g. mortgages, etc.), and a maximum of $394,725 in unsecured debt (e.g. credit cards, medical bills). If either of your debt levels exceeds these limits (which is rare for individuals, other than in the case of an individual operating as a business, such as a real estate developer), then you must file under Chapter 11.
If your debts appear to be too high to qualify, there may be strategies available to you to get your debts down so that you do qualify. This is where working with an experienced bankruptcy attorney can help you. Also, note that these debt limits change every three years; check online or with your attorney to find current debt limits.
Additional eligibility considerations
Aside from the Means Test and the maximum allowable debt levels for qualifying for Chapter 13 bankruptcy, there are a few other considerations as to whether you can qualify to file bankruptcy.
Previous bankruptcy discharges
If you have previously had your debts discharged through Chapter 7 bankruptcy, you may not receive a discharge through Chapter 7 again within eight years, or through Chapter 13 within four years.
However, if your previous case was Chapter 13, and your unsecured creditors received at least 70% of what was owing to them, there is no waiting period for Chapter 7. If they received less than that, you must wait six years from the previous filing date for Chapter 7. If the previous case was Chapter 13, you must wait two years before filing Chapter 13 again, regardless of what the creditors were paid.
Note that these waiting periods refer to receiving a discharge through a second bankruptcy. You still may file bankruptcy within the waiting period to receive protection from your creditors, but you will not be eligible to receive a discharge.
Recent dismissed filings
Also, even if you have not received a discharge, you may not file a new bankruptcy case for 180 days if you voluntarily dismiss a bankruptcy after a creditor filed a motion for relief from stay. A petition may be dismissed because you either failed to appear in court, or you didn’t comply with orders of the court, or you voluntarily dismissed the case after your creditors filed for relief from the automatic stay.
Domicile requirements: where you can file
Your “domicile” is where you make your permanent home. Although you can have several residences, you can only have one domicile, which is your main residence: where you pay taxes and where you vote.
Which state you may file your bankruptcy in depends upon where you have been domiciled and for how long. (As explained below, there are also domicile requirements about which exemptions you may claim). This gets complicated!
If your domicile has been the state where you live now for at least the last two years, then you must file in that state. If not, then the 180-day rule comes into effect. This rule looks at where you have been living for the majority of the last 180 days prior to filing.
Since just over half of 180 days is 91 days, this means that if you have recently moved you may have a choice of where to file. If you have been domiciled in your state for less than 91 days, you can either file bankruptcy in the state you lived in previously, or you can wait until you have lived in your current state for at least 91 days, and file there.
The reason that which state you file in matters is because the assets that you can exempt from the bankruptcy (and therefore keep) are different from state to state. If you have a choice of which state to file in, you will want to figure out which state allows exemptions that are more favorable to your personal situation.
Read on for our next article in this series: The Paperwork: Filing Your Bankruptcy Petition