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Bankruptcy qualifications in the US vary depending on the type of bankruptcy sought, including income, debt amount, type of debt, residence, and ownership. Chapter 7 and Chapter 13 are the most common types of bankruptcy filings available to individuals, with different income and debt limits and credit counseling requirements. The means test formula is used to determine income qualification for Chapter 7, including income received by the petitioner’s spouse, except for separate tax returns and Social Security benefits.
In the United States, individuals and some businesses struggling to meet their financial obligations have the option of filing for bankruptcy. Bankruptcy qualifications vary slightly depending on the type of bankruptcy sought. The main qualifying factors include the availability and amount of income, the amount of debt, and the type of debt. In some cases, there are also guidelines related to residence and ownership. Other countries where bankruptcy is an option will have different specific qualifications, but in many cases, the factors considered will be similar.
The most common types of bankruptcy filings that are available to individuals are Chapter 7 and Chapter 13. Chapter 13 filings are available only to individuals and not to corporations or partnerships. There are limits on the amount of debt owed when filing this plan. As of 2011, the limits were $360,475 in unsecured debt and $1,081,400 in secured debt.
Another qualifying factor for Chapter 13 bankruptcy is the availability of income. An applicant must receive a regular income, and the amount of that income must be adequate enough for normal household expenses. Additional qualifications for Chapter 13 bankruptcy include that an applicant must receive credit counseling through a court-approved credit counseling center.
The qualifications to file for bankruptcy under the Chapter 7 bankruptcy laws do not restrict eligibility to individuals. Corporations and partnerships are also eligible to file under Chapter 7, but only individuals can qualify for a debt discharge under the plan. A discharge releases the filer from liability for the debt included in the filing. As with Chapter 13, the applicant must agree to and participate in credit counseling as part of the program.
With a Chapter 7 plan, there are no limits to the amount of debt that can be included in the bankruptcy filing. Income requirements are also different from Chapter 13. Under a Chapter 7 filing, there is no income condition. In fact, if the applicant has an income, there are restrictions on how much that can be. Bankruptcy courts use a somewhat complex formula known as the means test to determine income qualification.
The first part of the means test compares the bankruptcy filer’s median monthly income to the median income for the state in which the bankruptcy petition is filed. In general, the income level should be less than the median. In cases where the applicant’s income exceeds the median income, a second test is applied. The second part of the means test formula measures the petitioner’s disposable income to determine if it is below a certain threshold. Finally, disposable income is compared to the amount of unsecured debt and eligibility is determined.
When considering bankruptcy income qualifications in a Chapter 7 filing, income received by the petitioner’s spouse is generally included. An exception exists when the couple have filed separate tax returns and maintain separate households. Income received through Social Security benefits is also excluded.
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