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Chapter 7 v. Chapter 13: a quick look at eligibility requirements

Last time, we began looking at the basic difference between Chapter 7 and Chapter 13 bankruptcy, noting that the difference lies in the approach to paying off creditors. We also mentioned that the eligibility requirements for Chapter 7 and Chapter 13 bankruptcy are different, but somewhat complementary.

Eligibility for Chapter 13 bankruptcy, which involves a repayment plan, is based on the amount of debts an individual carries. Under current requirements, a debtor may not have more than $383,175 in unsecured debts and $1,149,525 in secured debts. These amounts are subject to change based on changes in the consumer price index. This prevents wealthy debtors from qualifying. 

Chapter 7 bankruptcy, which provides a “fresh start”, does not involve any limitations on debt, but rather limitations on income. Debtor eligibility for this form of bankruptcy is governed by the means test, which involves evaluation of the debtor’s aggregate current monthly income over five years, minus certain expenses.

At present, the test presumes that a Chapter 7 filing is abusive if the debtor’s aggregate current monthly income is over $12,475 or, alternatively, 25% of the debtor’s nonpriority unsecured debt, provided that amount is at or above $7025. An abusive filing will be dismissed or converted to a Chapter 13 filing unless the debtor is able to show that special circumstances justify additional expenses or adjustments of his or her current monthly income.

Debtors who are considering a bankruptcy filing should always consult with an experienced attorney before doing so to have their case evaluated and determine the best course of action. An experienced attorney can help ensure not only that the right form of bankruptcy is selected, but also that the debtor has guidance throughout the process. 

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