Can anyone file bankruptcy?

One of the most common questions debtors ask is whether they are able to file bankruptcy and discharge a portion or all of their qualifying unsecured debts. Not all debtors will qualify for all types of bankruptcies. The most common personal bankruptcies are Chapter 7 and Chapter 13. Debtors must meet different qualifications for each bankruptcy. More information is provided below.

Chapter 7 Bankruptcy

To file Chapter 7 bankruptcy the debtor may be an individual, a partnership, or a corporation or other business entity. 11 U.S.C. §§ 101(41), 109(b). According to bankruptcy law, a debtor may not file if in "preceding 180 days a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court, or the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens."

Debtors must also receive credit counseling from an approved credit counseling agency, exceptions are made by the court if they determine there are not enough counseling opportunities available. Debtors much also pass a means test. Details are discussed below.

Means testing for Chapter 7 bankruptcy

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act which made several significant changes to the United States Bankruptcy Code. Among other things, one of the most significant changes it made was to restrict many filers from filing Chapter 7 bankruptcy and having their debts immediately discharged, forcing them, instead, to repay a portion of their debts by filing Chapter 13 bankruptcy.

Under the new bankruptcy law, consumers would have to pass a means test to determine whether they could file Chapter 7 bankruptcy. If the debtor made too much money and they filed Chapter 7, this was considered an "abuse" and they would have to file Chapter 13 bankruptcy. For instance, "abuse is presumed if the debtor’s aggregate current monthly income over 5 years, net of certain statutorily allowed expenses is more than (i) $10,000, or (ii) 25% of the debtor’s nonpriority unsecured debt, as long as that amount is at least $6,000." Debtors who do not pass the means test or whose income is too high will be barred from filing Chapter 7 bankruptcy.

Chapter 13 Bankruptcy

According to United States bankruptcy law, "any individual, even if self-employed or operating an unincorporated business, is eligible for Chapter 13 relief as long as the individual's unsecured debts are less than $360,475 and secured debts are less than $1,081,400. 11 U.S.C. § 109(e)." Keep in mind, laws are updated periodically and the amounts are adjusted. A corporation or partnership may not be a Chapter 13 debtor.

Individuals are restricted from filing Chapter 13 bankruptcy or any other chapter if in "the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e)." Filers must also receive credit counseling 180 days prior to the bankruptcy filing from an approved credit counseling course.