The Starting Point: Are You Eligible for Chapter 7, Chapter 13, or Both?

You may be very clear about whether you want to file a Chapter 7 “straight bankruptcy” or a Chapter 13 “payment plan.” Choosing between them can often be very simple and obvious. On the other hand, there are at least a dozen major reasons why one may be better for you than the other, some of which you may not be aware of. So it’s wise to be open-minded about this when you first meet with an attorney.

The starting point is to find out which of these two options you are eligible for, and whether you might be eligible for both.

Eligibility depends on 1) who is filing the bankruptcy, 2) the kinds and amounts of debts, 3) income, 4) expenses, and 5)whether you have filed bankruptcy in the past.

1) Who Can File the Bankruptcy:

Although it may sound odd, you can file either a Chapter 7 or 13 case if you are an “individual,” a human being. Either a Chapter 7 or 13 can be filed as a “joint case” by “an “individual and such individual’s spouse.”

A corporation or business partnership can also file a Chapter 7 case, but not a Chapter 13 case. If you own a business in financial trouble and it was formed as a corporation or partnership (or limited liability company—LLC—or any of the other similar legal business structures), it can file its own Chapter 7, whether or not you also file a Chapter 7 or 13 individually. However, a corporation or LLC cannot receive a discharge in Chapter 7.

2) Kinds and Amounts of Debts:

If you have “primarily consumer debts” (more than 50% by dollar amount are “consumer debts”), then you have to pass the “means test” to be allowed to be in a Chapter 7 case. (More about that below.) So if at least 50% of your debts are business debts, then the “means test” does not apply to you.

Chapter 7 has no maximum on the amount of debt allowed. But Chapter 13 is limited to individuals with a maximum of $360,475 in unsecured debts and $1,081,400 in secured debts. These remain the same—are not doubled—in a joint case filed by two spouses.

3) Income:

The “means test” in Chapter 7 is satisfied if your income is no more than the published “median income” for your family size and state. There is much more to this than we can cover here. Do note that as of May 1, 2012 these median income amounts were adjusted, so that in Oregon they are now:

Add $7,500 for each individual in excess of 4.

Chapter 13 requires “regular income,” defined as income “sufficiently stable and regular” to enable you to “make payments under a [Chapter 13] plan.” Also, if the income is less than the above applicable “median income” amount, then the payment plan will generally last three years; if the income is at or above the applicable “median income” amount, the plan will last five years.

4) Expenses:

In Chapter 7, if your income is larger than the above applicable amount, you may still pass the “means test” and qualify for Chapter 7 through a complicated mathematical analysis of your expenses, and/or by bringing some extenuating circumstances into the picture.

In Chapter 13, a similar calculation determines the amount you must pay monthly into your plan to satisfy the requirements of Chapter 13.

5) Prior Bankruptcies

If you have filed bankruptcy in the past, you have to wait a certain number of years before you can file another bankruptcy case and receive a discharge. The number of years you have to wait from the day you filed your previous bankruptcy case until you are eligible to file another case and receive a discharge are as follows:

If you filed Chapter 7, you have to wait at least 8 years to file another Chapter 7 and 4 years to file a Chapter 13.

If you filed Chapter 13, you have to wait at least 6 years to file Chapter 7 (unless in your Chapter 13 case you paid off 100% of the unsecured claims in the case), and at least 2 years to file another Chapter 13.