In the United States, individuals and some businesses that are struggling to meet their financial obligations have the option of filing for bankruptcy. The qualifications for bankruptcy vary slightly according to the type of bankruptcy sought. The primary qualification factors include the availability and amount of income, the amount of debt and the type of debt. In some cases, there also are guidelines pertaining to residency and property ownership. Other countries in which bankruptcy is an option will have different specific qualifications, but in many cases, the factors that are 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 corporations or partnerships. There are limits on the amount of debt owed when filing under this plan. As of 2011, the limits were $360,475 US Dollars (USD) of unsecured debt and $1,081,400 USD 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 bankruptcy under Chapter 13 include an applicant being required to receive credit counseling through a credit counseling center that has been approved by the courts.
The qualifications for bankruptcy filing under Chapter 7 bankruptcy laws do not restrict the eligibility to individuals. Corporations and partnerships are also eligible to file under Chapter 7, but only individuals can qualify for a discharge of debt under the plan. A discharge releases the filer from liability for the debt included in the filing. As with Chapter 13, the applicant must accept 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. The income requirements also are different from Chapter 13. Under a Chapter 7 filing, there is no condition of income. In fact, if the applicant does have an income, there are restrictions on the amount that it can be. Bankruptcy courts use a somewhat complex formula referred to as a means test to determine the income qualification.
The first part of the means test compares the average monthly income of the bankruptcy candidate to the median income for the state in which the bankruptcy petition is filed. Generally, the level of income 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 whether it is below a certain threshold. Finally, the disposable income is compared with the amount of unsecured debt, and a determination of eligibility is made.
When considering the income qualifications for bankruptcy in a Chapter 7 filing, income received by an applicant’s spouse usually is included. An exception exists when the couple has filed separate tax returns and maintains separate homes. Income received through Social Security benefits are excluded as well.