Do You Have to Meet Certain Criteria in Order to File for Bankruptcy?

Interviewer: The first question I'm going to ask is how do I know if I qualify to file a bankruptcy, either a Chapter 7 or a 13?

Your Income Determines Which Bankruptcy Option Is Better for Your Situation

Vance: Everybody qualifies for either one. When considering which option is better for you, in a Chapter 13 income determines what kind of bankruptcy you qualify for. That's the first thing we look at, your income.

If your income is above the median and that changes every month that will be something we take into consideration. Median income is based on household size. If your income is above that, then there's a presumption that you have to file a Chapter 13 and pay back some of your debt. That was the whole purpose of the change in October of 2005. That was when they had the big change of the bankruptcy laws to force people that could afford to pay something into a Chapter 13 payment plan.

The Average Payment Plan in a Chapter 13 Bankruptcy Is 15 to 20 Cents on the Dollar of the Total Debt You Have Accumulated

However, it didn't work. Before October 2005, 75% of my bankruptcy were Chapter 7, 25% were Chapter 13, now it's about a 60-40 split. The people that can afford to pay something are paying something back. The plans can range anywhere from one percent of what you owe to 100% of what you owe. The average repayment plan is about 15 to 20 cents on the dollar.

You come and you talk to me and we determine what to option you should file. Many attorneys go through the means test, which is something they adopted in October, 2005 and it looks like a tax return. You go through the items add in income and expenses and their 401K deductions and then insurance deductions. At the end of the form, if you have more than x amount of dollars left over at the end of the month, then you don't qualify for a Chapter 7. You have to file a Chapter 13.

Some People Who Qualify for a Chapter 7 Choose a Chapter 13 to Retain Their Possessions

Income is a big determining factor. Then some people, even though they do qualify for a Chapter 7, they're looking at saving their homes or saving their cars so they'd have to file a Chapter 13 if they wanted to do that.

Interviewer: You couldn't actually keep your home or your cars under Chapter 7, only Chapter 13 allows you to retain these items?

Vance: No, you can keep your cars but some people desire to save their homes but they're seriously behind on the mortgage.

If You Are Filing a Chapter 7, You Must Be Current on Your Home and Car Payments in Order to Retain Ownership

Only Chapter 13 gives you a method to put the arrearage, which is the amount of money you're behind on your home and your car into the plan to pay it off. People that file Chapter 7 can't keep their homes and their cars unless they are current on the payments.