Not everyone qualifies for bankruptcy. Certain requirements must be met before you can obtain relief under the Bankruptcy Code. Whether you file Chapter 7 or Chapter 13, one of the first requirements of bankruptcy is the completion of a credit counseling course. Unless you are: 1) active-duty military, 2) incapacitated or have a disability which prevents you from participating, or 3) if the course is not available to you, you must complete the course within the 180-day period prior to filing your bankruptcy petition. A certificate of completion should accompany your Petition when it is filed. If not, the certificate may be filed within 14 days of filing the Petition. The credit counseling course provides financial counseling. That counseling includes developing a plan to pay all or a significant portion of your debts. Unfortunately, many debtors are unable to develop a viable plan so they proceed to file bankruptcy.
If you choose to file bankruptcy under Chapter 7, the first major hurdle you will face is the Means Test. The Means Test is used to determine whether you can pay back some of your unsecured debts. You must take the Means Test if your current monthly income (CMI) exceeds the median monthly income for your geographic area. (I’ll explain the “Means Test” in depth at a later date.) Typically, individuals with higher incomes do not satisfy the Means Test.
If you satisfy the Means Test, then the next hurdle in the bankruptcy process is satisfying the Abuse Under All the Circumstances Test. (I’ll refer to this test as the Abuse Test.) Like the Means Test, the Abuse Test is used to determine whether you can pay your creditors. The difference between the two is that the Means Test is based on CMI while the Abuse Test is based on your actual income. Your CMI is the average monthly income earned over the 6-month period prior to filing bankruptcy. Actual income is just as it sounds. It’s what you actually make each month. If you fail to satisfy the Means Test or the Abuse Test, it is unlikely you will be allowed to seek relief under Chapter 7.
If you filed bankruptcy in the past and obtained a discharge, the Code bars you from filing a Chapter 7 bankruptcy for a fixed period. This is colloquially known as the “wait period.” If your previous bankruptcy was a Chapter 7, you must wait 8 years from when you filed the initial bankruptcy before you can file again. If your previous bankruptcy was a Chapter 13, the wait period decreases to 6 years from the date you filed the initial bankruptcy. However, if you filed the initial Chapter 13 in good faith and paid at least 70% of the unsecured debts before obtaining a discharge, then the 6-year wait period does not apply.
Other Barriers to a Chapter 7 Discharge
Keep the following issues in mind as well if you intend to seek debt relief under Chapter 7. You cannot file Chapter 7 if you had a previous bankruptcy dismissed within the past 180 days for the following reasons:
- you violated a court order, or
- you requested the bankruptcy be dismissed after a creditor asked for relief from the automatic stay.
Additionally, you cannot file a Chapter 7 if you attempt to defraud your creditor. Defrauding your creditors includes such things as giving property away (or selling it at an unreasonably low price) to friend and relatives, purchasing items without the intention to ever make payments, and hiding assets from a spouse during a divorce proceeding.
No Means Testing
If you decide to seek relief under Chapter 13, then you do not have to worry about the Means Test. The results of the means test will not prevent you from seeking relief under Chapter 13. In fact, the Means Test isn’t even applicable, since under Chapter 13 you will be using your disposable income to pay back some, if not all, of your unsecured debt.
One of the first hurdles to overcome when filing bankruptcy under Chapter 13 is the size of your debt. Currently, the debt limit for secure debts is $1,184,200 while the unsecure debt limit is $394,725. If your debts exceed these amounts, then you will not be able to file bankruptcy under Chapter 13. Therefore, it is important to understand how your debts will be categorized.
If your debts do not exceed the Chapter 13 debt limits, the next hurdle will be the income requirement. Chapter 13 bankruptcy requires you to have a steady source of income that will support a successful payment plan over the course of (depending on the circumstances) three to five years. Under the plan, all mandatory debts must be paid in full and unsecured creditors must receive an amount equal to what they would have received if the case had been filed under Chapter 7.
Like Chapter 7, if you filed a previous bankruptcy and obtained a discharge, there is a “wait period” that must toll before you can obtain another discharge. If your previous case was a Chapter 7 case, then you must wait four years from the date of filing before you can obtain another discharge. If your previous case was a Chapter 13 case, then you must wait 2 years. Unlike Chapter 7, which prevented filing until the wait period has tolled, you MAY file for Chapter 13 bankruptcy any time after the initial discharge. You just won’t get the discharge until the wait period has tolled, but you will be able to set up a payment plan.
Other Barriers to Chapter 13 Discharge
The final two hurdles of significance that will bar you from obtaining debt relief under Chapter 13 are income taxes and support payments. Your income tax filings are required to be up to date before filing and should remain current throughout the plan period. In regards to support payments (alimony and/or child support) any missed payments (arrearage) can be paid back over the course of the plan period. However, current payments must be kept up to date or you risk dismissal of your Chapter 13 case.
Prior to obtaining your discharge, you will be required to attend a post-filing personal financial management course. If you complete the course, make all applicable payments, and satisfy the requirements of the Court and Trustee, your discharge should be approved.