Bankruptcy qualifications are complex and take into consideration the applicant's gross income, disposable income, amount of debt, type of debt and assets. Based on these factors, individuals must determine whether chapter 7 bankruptcy (straight bankruptcy) or chapter 13 (a court-supervised debt repayment plan) best meets their individual financial situation. Because individual states determine the requirements for personal bankruptcy, debtors should consult an attorney before petitioning the court.
Chapter 7 Means Test
In order to qualify for chapter 7 bankruptcy, filers must pass a means test that compares their income to the median income for their state. In a chapter 7 proceeding, the only income considered is that which was earned in the immediate six months prior to filing for bankruptcy. Persons whose income is above the median for their place of residence, must instead file chapter 13 bankruptcy, which requires petitioners to repay their debts under the supervision of the court.
Disposable Income Under Chapter 13
To file for a chapter 13 bankruptcy debt-restructuring program, the applicant must be able to show that they have adequate disposable income to make regular payments to their creditors. In a bankruptcy, disposable income is defined as money that is left over after covering basic expenses such as housing, utilities, food and transportation.
Prior to filing for bankruptcy, individuals must complete a credit counseling and debtor education programs. These programs cover issues such as personal budgeting and strategies for managing credit. Prospective bankruptcy petitioners should note that these programs are not the same as debt consolidation programs. Additionally, only programs approved by the U.S. Department of Justice Trustee Program count towards this requirement.
Not all debts are dischargeable under personal bankruptcy laws. Examples of dischargeable debts are unsecured credit cards, medical bills, personal loans, debts arising after repossession of a vehicle and civil judgments stemming from negligence and auto accidents. Debts that are not dischargeable under bankruptcy laws include student loans, child support, alimony, criminal fines, fraudulent debts, taxes and secured debts.
To formally file for bankruptcy, individual debtors must file a bankruptcy petition with the court that lists the names and addresses of the filer's creditors and the amount owed on each account. Bankruptcy petitions must also list the individual's income, size of the household and monthly expenses. Additionally, the bankruptcy petition must list all of the applicant's assets, including savings and investments and an itemized list of personal property.
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