Almost anyone can file either Chapter 7 or Chapter 13 bankruptcy and take advantage of the automatic stay to prevent adverse action, including repossession and foreclosure. But not everyone can obtain a Chapter 7 or Chapter 13 discharge, because each section has important financial and non-financial qualifications.
In reality, these qualifications are more like guidelines that steer families into the type of bankruptcy that is best suited for their financial situations, thus preventing them from compounding past mistakes or misfortunes with additional preventable errors.
Consumer Bankruptcy Qualifications
In 2005, Congress passed the oddly-named Bankruptcy Abuse Prevention and Consumer Protection Act, based on the mostly erroneous notion that families purchased expensive luxury goods with credit cards then immediately filed bankruptcy to avoid paying for them. This law requires all bankruptcy debtors to take a pre-filing debt counselling class. Each course usually costs about $20 or $40 and can be completed online in twenty or forty minutes.
Thereafter, before debtors receive their discharge orders, they must complete an additional budgeting and financial management class. These courses are available online as well. Additionally, free live classes are usually available at many bankruptcy trustee offices.
The other non-financial qualification — the duty to cooperate with the trustee — has been around for quite some time. At a minimum, that involves attending the 341 creditors meeting providing proof of identity (Social Security card and driver’s license) and proof of income. Most trustees want the last two years of tax returns and the last two months of paystubs or business profit and loss statements.
Some trustees require additional documents, such as insurance declaration pages and home mortgage documents. These requests usually do not mean that there are problems with the bankruptcy; they just mean that the person who oversees the bankruptcy for the judge wants more paper in the file.
Chapter 7 Qualification
The means test is another BAPCPA reform. To qualify for Chapter 7, a debtor’s income (or joint income) must be lower than the average income for that family size in that geographic area. As of November 2017, the figure for a family of four is just under $95,000 in Illinois and just over $79,000 in Indiana. The number changes about once every three months.
These are average figures. The actual threshold for a particular family in a particular location may be considerably different, so it’s important to consult with an experienced attorney.
Chapter 13 Qualification
Chapter 7 debtors must have low incomes because these filings are essentially declarations that the debtors cannot afford to pay their obligations. On the other hand, since Chapter 13 debtors essentially declare that they need income-based payment plans, they must demonstrate that they have sufficient income to support such plans.
An attorney can normally estimate the monthly debt consolidation payment to determine if a Chapter 13 is sustainable. This payment must fully satisfy all secured debt arrearage, cover a 10 percent trustee payment, and also satisfy all unsecured debts in the same way as a Chapter 7 (which usually means no unsecured debt payments).
Debtors who find that they cannot afford the debt consolidation payments can convert to Chapter 7 at any time.
Rely on Experienced Attorneys
Different debtors have different bankruptcy choices. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We routinely handle cases in both Illinois and Indiana.