Considerations When You've Decided on Bankruptcy

If you've decided to file for bankruptcy, here are the first things to consider.

If you have already decided to file for bankruptcy, you must also consider:

  • which type of bankruptcy you are eligible to file
  • whether Chapter 7 or Chapter 13 bankruptcy is in your best interest, and
  • whether you should file an individual or joint bankruptcy with your spouse.

To learn more about further filing considerations, see the article listed in Should I File for Bankruptcy?

Eligibility Requirements for Bankruptcy

Both Chapter 7 and Chapter 13 bankruptcy have their own unique eligibility requirements. In general, the type of bankruptcy you qualify for depends on your income, expenses, and amount of debt.

Qualifying for Chapter 7 Bankruptcy

To qualify for Chapter 7 bankruptcy, you must pass the means test. The means test looks at your average monthly income for the six months preceding your filing date and compares it against the median income for a similar household in your state. If your income is below the state median, you automatically pass and do not have to fill out the entire form. If it is above median, you must complete the rest of the form and take into account certain expenses to determine if your disposable income is low enough to file for Chapter 7 bankruptcy.

For more information, see The Means Test in Chapter 7 Bankruptcy.

Qualifying for Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, you propose a repayment plan to pay back some or all of your debts over a three to five-year period. As a result, you must have sufficient income to afford your plan payments each month. Further, to qualify for Chapter 13 bankruptcy you cannot have more than $1,184,200 in secured debts or $394,725 in unsecured debts (as of April 2016).

To learn more, see Debt Limits for Chapter 13 Bankruptcy.

Should You File for Chapter 7 or Chapter 13 Bankruptcy?

If you don’t qualify for Chapter 7 bankruptcy, Chapter 13 may be your only option. However, even if you can file a Chapter 7, Chapter 13 bankruptcy can be more advantageous in certain circumstances.

In Chapter 7 bankruptcy, the bankruptcy trustee has the power to sell your nonexempt property to pay back your creditors. As a result, a Chapter 7 may not be in your best interest if you own a lot of assets. In contrast, Chapter 13 bankruptcy allows you to keep all of your property in exchange for paying back a portion of your debts through your repayment plan.

Further, if certain conditions are satisfied, Chapter 13 bankruptcy offers debtors additional benefits that are not available in a Chapter 7 such as the ability to:

  • reduce the principal balance of your car loan or investment property mortgage with a cramdown, or
  • eliminate your second mortgage or other unsecured junior lien through lien stripping.   

To learn more, see Which Is Right for You: Chapter 7 or Chapter 13 Bankruptcy?

Should You File an Individual or Joint Bankruptcy?

If you are married, you can choose to file for bankruptcy jointly with your spouse or individually. In general, filing for bankruptcy together makes sense if you have a lot of joint debts and your state allows you to double your bankruptcy exemptions in a joint filing.

However, an individual bankruptcy may be in your best interest if:

  • only one spouse has debt
  • one spouse has nonexempt separate property that may be at risk in bankruptcy (be aware that in community property states all community (marital) assets are considered property of the bankruptcy estate), or
  • your state does not allow married couples to double their exemptions in a joint case.

To learn more, see Bankruptcy Filing Options for Married Couples.

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