There are two types of bankruptcy filings for individuals: Chapter 7 or Chapter 13. Chapter 7 is the one that most people have heard about—it’s the one where debts get written off, never to be seen again. Chapter 13 is the reorganization bankruptcy were debts are arranged into a three to five-year payment plan. It used to be that anyone could apply for Chapter 7 and, if the judge ruled in their favor, get their debts discharged even if they were able to repay them. However, on October 17, 2005, this changed. Now, Chapter 7 filers must meet certain requirements.
Filers must pass a bankruptcy means test to determine whether their income is more or less than the median income in their state. If the income is below the median, then the filer qualifies for Chapter 7. However, if their income is above the median, then certain expenses, such as housing and food, can be deducted to determine how much disposable income the debtor has to pay off their debts.
Income is calculated from a six-month look back period. For instance, if Larry files for bankruptcy in April, his look back period will be the six months prior to April (from October through March). All income—including untaxed income such as retirement income—must be included in the calculation.
If a filer doesn’t pass the means test, then he or she will only be allowed to file for Chapter 13 bankruptcy.
Previous Bankruptcy Filings
The court doesn’t allow a person to file multiple bankruptcies in short succession. If a filer received a Chapter 7 discharge within the last eight years or a Chapter 13 discharge within the last six years, he or she will not be eligible to file a Chapter 7 bankruptcy. However, if the first discharge was through Chapter 7, then a person can file for a Chapter 13 after four years have passed.
A bankruptcy application may also be denied if a bankruptcy case (either Chapter 7 or Chapter 13) was dismissed within the past 180 days (or 6 months). Bankruptcies get dismissed when:
- a court order is violated.
- a filing is found to be filed in bad faith (i.e. fraudulent or an abuse of the bankruptcy system).
- the filer requests a dismissal of the case after a creditor asks for relief from the automatic stay.
Bankruptcy laws are set up in such a way so that those who genuinely need relief from a financial crisis can do so and those who seek to use bankruptcy to get out of paying legitimate debts are kept from doing so. When you’re facing a financial crisis, it’s important to make sure you’re staying on the right side of the law. And a qualified bankruptcy lawyer can help you do just that. Bankruptcy can be a legal maze. Don’t go through it alone.