Is it the right option for you?
Qualifying for bankruptcy means understanding whether you meet the legal requirements to file and benefit from debt relief. Bankruptcy is a federal court process that helps individuals and businesses eliminate debt or repay it under court protection. In general, bankruptcy cases fall into two categories: liquidation and reorganization.
Chapter 7 vs. Chapter 13 Bankruptcy
Chapter 7 bankruptcy allows individuals to eliminate qualifying debts through the bankruptcy court. In contrast, Chapter 13 bankruptcy requires debtors to submit a repayment plan. This plan explains how they will repay creditors over time.
In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act. As a result, the rules for filing Chapter 7 bankruptcy became stricter.
Eligibility Requirements for Chapter 7
Debtors must now complete budget and credit counseling within six months before filing. In addition, the court applies a financial means test to measure repayment ability. Many people cannot file Chapter 7 if their household income exceeds the state median. Furthermore, debtors may only use state exemptions if they have lived at their current residence for more than two years.
When Chapter 13 Becomes the Only Option
Because of these requirements, some individuals no longer qualify for Chapter 7 bankruptcy. Instead, they must file under Chapter 13. This process involves a court-approved repayment plan lasting three to five years. During this time, a trustee monitors all payments to creditors.
A Chapter 13 filing remains on a credit report for seven years. By comparison, a Chapter 7 filing can remain for up to ten years.
Debts That Cannot Be Discharged
Not all debts qualify for discharge in bankruptcy. Common non-dischargeable debts include taxes, spousal support, and student loans. However, experienced lawyers can help clients plan carefully. With proper guidance, clients can maximize the number of debts discharged and improve their chance at a true financial fresh start.