DO I QUALIFY FOR BANKRUPTCY ?
Guidelines for Filing Chapter 7 and Chapter 13 Bankruptcy
Most people wonder to themselves if they can possibly file for bankruptcy?
Chapter 7 Eligibility
To be eligible to file for a chapter 7 you must either take the “means test” or be exempt from the means test. If you earn less than the median income for California you are exempt and do not have to take the means test to qualify to file Chapter 7. The median income for California is $62,171 for households with one person, $82,418 for two person households, $91,605 for three person households, and $105,232 for four person households (as defined by the US Census Bureau). If your income, before any payroll deduction is below these figures for your household, you are exempt from the means test and may qualify to file for Chapter 7.
Business Debts AND IRS Debts May Be Exempt from Means Test
If more than 50% of your debts are considered business debts, you are also exempted from taking the means test. Generally, IRS debts for personal income taxes due are considered business debts (even if you have never owned a business.) If more than 50% of your debt is from taxes, you may be exempt from the means test.
The means test is an analysis of your income, expenses and debts. The means test determines whether your income is low enough for you to qualify to file a Chapter 7. The means test tries to determine whether, after paying your reasonable and necessary expenses, you have sufficient money left over (left over money is called disposable income) to pay your creditors. If you have enough disposable income, you will not qualify for Chapter 7 because, in the court’s eyes, you should be using that money to pay your creditors.
You cannot get another Chapter 7 bankruptcy discharge if you obtained a discharge of your debts in a Chapter 7 bankruptcy case within the last eight years, or a Chapter 13 case within the last six years. (Learn more about when you can file for bankruptcy again.)
Keep in Mind
These are just two considerations in qualifying for Chapter 7, but there may be other unusual circumstances that prevent you from qualifying for Chapter 7. Also, even if you qualify for Chapter 7 doesn’t automatically mean this is the best decision for you. You should consider the positives and negatives in filing for bankruptcy and come to the decision based on the totality of your financial and personal circumstances. We can help provide you with guidance and legal analysis to assist you in coming to that determination.
Chapter 13 Eligibility
In order to file for a Chapter 13 you need to show that you have filed your income tax returns for the IRS and State for four previous years.
Under a Chapter 13 bankruptcy, you will be making payments to your creditors under a plan created by yourself (with help from your attorney) and approved by the court. In order to file a Chapter 13 You need to have sufficient income to make regular payments to your creditors under this plan. The plan you create must pay back some debts in full, so the amount you will need to earn varies from person to person, but the court will ultimately make the decision on approving the plan or disallowing it. Note: Under a Chapter 13 plan, in California your spouse’s income may help you qualify for a Chapter 13 plan.
3 years or 5 years?
Whether you are eligible for a 3 year plan or a 5 year plan is based in part on whether you are above or below the median household income for the State. If your household income is below the median (The median income for California is $60,360 for households with one person, $79,271 for two person households, $88,235 for three person households, and $101,315 for four person households (as defined by the US Census Bureau), then you might be eligible for a three year plan to pay back you debts. If you are above the median, you must commit to a five year plan.
If the total of your secured debts (mortgages and liens) are $1,184,200, or your unsecured debts (credit cards and some personal loans for example) are more than $394,725 in total, Chapter 13 may not be an option.
Businesses Can’t file Chapter 13
Chapter 13 doesn’t help with business debts (for example, corporate debts), though you can still file as an individual and you will include your business debts (sole proprietor debts and debts you are a personal guarantor on), but the business will still be liable for these debts.
Keep in Mind
Stockbrokers and commodity brokers cannot file a Chapter 13, even if their debts are personal and not business debts.
These are just some of the considerations and qualifiers for filing a Chapter 13 Bankruptcy; there may be other circumstances that prevent you from filing for a Chapter 13 Bankruptcy. Also, even if you qualify for Chapter 13 doesn’t automatically mean this is the best decision for you. You should consider the positives and negatives in filing for bankruptcy and come to the decision based on the totality of your financial and personal circumstances.