Can I Qualify?

Many of our bankruptcy clients are surprised to learn how easily we can determine whether or not they can qualify for bankruptcy protection here in Washington State.

The primary mechanism used to determine whether or not someone can qualify for bankruptcy is their income, or their household income. This is often referred to as the bankruptcy "Chapter 7 Means Test". The first phase of the means test involves comparing your household income to the median income here in Washington State. If your income is too high, the second primary factor in determining whether or not you can qualify for bankruptcy is often a careful and detailed analysis of your monthly expenses.

Another primary issue is whether or not you have any significant assets that are not exempt under the bankruptcy code. And, the fourth primary factor is occasionally the total amount of debt you owe. Other factors can also affect your ability to qualify for bankruptcy protection, but typically to a lesser degree. For example, if you have filed for bankruptcy previously, there are time limits regarding when you can file again based on the type of bankruptcy chapter that you previously filed and the type that you are intending to file now.

There are other lesser factors than can sometimes come into play. But, these are rare. Another primary issue, however, is simply whether or not filing for bankruptcy makes sense. We occasionally field calls from potential bankruptcy clients where the amount of debt they have simply doesn't warrant filing given their current income. This is often because things like student loans, court fines, and most back taxes are not dischargeable in bankruptcy, except in rare circumstances. And, court fines are never dischargeable.

Our Washington State bankruptcy attorneys take a big picture approach that is highly focused on your individual situation when providing you with your initial consultation. If we don't believe that you are a good candidate for bankruptcy, we'll tell you right away. The last thing we want to do is encourage someone to file for bankruptcy when other options might be better a approach.

Over the years, our bankruptcy lawyers have learned that every case is unique. That's why we start every bankruptcy consultation by listening carefully to our clients. We want to know as much about your current financial situation so that we can help you make the most informed decision possible. Most consumers file either a Chapter 7 or a Chapter 13 bankruptcy, though in some rare cases involving a very high amount of debt, a consumer has to file a Chapter 11 bankruptcy, which is usually reserved for business.

Any person or business can file any kind of bankruptcy. An individual can file or a married couple can file together. Even an undocumented worker can file. You can only file one Chapter 7 and get a discharge every eight years. If you file a Chapter 13 within 4 years of filing a Chapter 7, you can not get a discharge in the Chapter 13, though you can file it and have protection for your creditors as long as the repayment plan lasts.

The next question is what happens if my case is not properly analyzed? For example, if someone with a higher income files a Chapter 7 bankruptcy without a careful monthly expense analysis, there is a good chance that the court will decide they are abusing the bankruptcy system. This is because a Chapter 7 does not involve any payments to creditors, either through monthly payments or the loss of property. If a debtor makes over the median income of a household of his or her size, then the debtor must go through a formal "means test".

This can be a complicated process and analysis. And, if you fall into this category, we strongly encourage you to seek the help of a reputable and experienced Washington State bankruptcy attorney. The means test takes an average of the debtor’s income going back six months and deducts monthly expenses from it. If there is anything left over, there is a presumption of abuse by the bankruptcy filer. This presumption can be overcome by claiming special circumstances. If the presumption is not overcome, however, you case is dismissed or possibly converted to a Chapter 13.

To qualify for a Chapter 13 bankruptcy, you have to be able to make the monthly payments required to fund the plan. That means you have to be employed or have a steady, reliable source of income that will not end during the three to five year plan. Putting together a viable Chapter 13 plan also involves a complicated analysis based on your income and your monthly expenses, which can also be somewhat variable from month to month. The issue is further complicated if you are self-employed.

Additionally, in order to qualify for a Chapter 13 bankruptcy in Washington State, your unsecured debt cannot be more than $360,475 and your secured debt cannot be more than $1,081,400. If you are over these limits, you can still successfully discharge debt in a Chapter 7, as long as you are not found to be abusing the bankruptcy system. If you have a higher income, you may have to file a Chapter 11 bankruptcy if your debt is over the Chapter 13 debt limits.

Because Chapter 7 is relatively easy and results in no payments to creditors, it is reserved for people who do not have the ability to pay with their income. If you can qualify for Chapter 7 bankruptcy protection, it is typically your best option. But, as detailed above, if you make over the median income for your household size, you have to fill out a means test to show that you still do not have money to pay unsecured creditors in a Chapter 13 bankruptcy plan.

The means test looks back six months and takes an average of your income. Then secured debt, health insurance, day care, child support, taxes and other actual expenses are deducted from your income. Some other expenses are limited by law, such as rent, food, transportation, and clothes. If there is any income left in the means test, this is the amount you would have to pay your unsecured creditors, such as credit cards and medical bills, presumably in a Chapter 13 plan. This amount could be small, but it could be as much as 100%.

You can also keep certain indebted property and just pay the secured creditors, such as mortgage companies or car companies if you want to keep the property. But you do not have to, and it is often just best to walk away from the obligation, unless unusual circumstances are present. After you qualify and file your Chapter 7 bankruptcy, you can simply stop paying and just give back the property without paying anything more. In very rare circumstances, creditors can also be paid in a Chapter 7 by liquidating assets (selling property and converting it to cash). In our experience, however, the overwhelming majority of people that we qualify for Chapter 7 bankruptcy, are able to protect and to keep all their assets with bankruptcy exemptions.

Getting properly qualified for bankruptcy and filing the right chapter is very important. If you file and try to stay in Chapter 7 bankruptcy when there is income in the means test to pay unsecured creditors, there is a presumption that you are abusing the bankruptcy system. Now, you can overcome this presumption by showing that your situation is not accurately measured by the means test. To do this you, however, you must convince a bankruptcy judge that you have “special circumstances”, such as a sudden drop in income, a new household member or some other reason why you are not abusing the system.

Basically, anyone “qualifies” to file bankruptcy if they meet certain financial guidelines, but some people may face some hurdles to see it through. However, it's important that your Washington bankruptcy attorney understand the rules regarding multiple filings. Again, you can only file one Chapter 7 petition and receive a discharge every eight years. If you have filed a Chapter 7 and received a discharge in the last four years, you can not get a discharge in Chapter 13. And, although it is not necessarily party of the "qualification process", in order get a discharge, you must also take a credit counseling class before you file any type bankruptcy.

The answer to this question is both yes and no. And, our bankruptcy attorneys will be happy to explain this issue in more detail during your free initial consultation. But, here's the quick answer.

Chapter 13 is easier to “qualify” for because you are paying off some of your debt. There is no hard "cut off" with regards to income, only total debt. But, it is much more complicated because you must present a viable payment plan, and you do need to have your bankruptcy plan confirmed by a bankruptcy judge.

You have to be able to show that your plan complies with the law and that you are also able to make the payments. You also cannot be over the debt limits in a Chapter 13, which is just over $1,000,000 in secured debt and $350,000 in unsecured debt. If you are over these limits and do not qualify for Chapter 7, you have to file a much more complicated and expensive Chapter 11. It is rare for consumers to file Chapter 11 because that is usually reserved for businesses.