Chapter 7 vs. Chapter 13: Means Test and Eligibility Requirements

Chapter 7 bankruptcy allows debtors to discharge their debts by selling assets (subject to bankruptcy exemptions) and using the proceeds to repay creditors. Chapter 13 bankruptcy sets up a monthly payment plan over a three- or five-year period.

To determine which type of bankruptcy to file for, bankruptcy courts apply a means test to evaluate a debtor’s regular income and whether it’s sufficient to repay their debts. The means test leaves some debtors with no option but to file under Chapter 13. For others, Chapter 13 is the better option.

For married debtors, their spouse’s income must be included in their current monthly income (CMI) unless they’re legally separated. This is the case whether a debtor is filing for bankruptcy with their spouse or as an individual. For legal advice, reach out to a bankruptcy lawyer.

The Means Test: Determining Whether You Qualify for Chapter 7

The means test ensures that only debtors lacking resources to repay debts qualify for a Chapter 7 discharge. If the debtor has excess disposable income to pay their debts, their creditors should have access to that extra income to satisfy at least a portion of the debt.

The means test has two parts:

1. Determine whether the debtor’s current monthly income (CMI) is greater than or less than the median family income. If it’s less, the debtor passes the test and qualifies for a Chapter 7 discharge. If the debtor’s income is higher, they must complete the second part of the means test calculation to determine if they will qualify for a Chapter 7 discharge.
2. Deduct certain necessary expenses from the debtor’s CMI to determine the debtor’s disposable income. If they’re not found to have enough disposable income, they will pass the means test and qualify for a Chapter 7 discharge. If not, the debtor will only be able to file under Chapter 13.

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Can You Keep Assets in a Bankruptcy?

Chapter 7 bankruptcy is often called a liquidation since it sells off, or liquidates, the debtor’s assets to repay debts. Many types of debts are exempt from liquidation by the trustee during bankruptcy. However, some are not, or are worth more than the exemption allows.

If a debtor wants to keep nonexempt property or prevent the sale of an asset valued above the exemption amount, their only option may be to file for Chapter 13 bankruptcy.

Setting up a Chapter 13 Repayment Plan

For example, a debtor who owns a home or vehicle with equity exceeding the current exemption amount may not want to lose that property. A debtor will likely be able to keep that asset in a Chapter 13 bankruptcy.

However, the amount of nonexempt assets a debtor owns will be used to calculate the minimum amount the debtor must pay through their Chapter 13 reorganization plan.

“Most Chapter 13s don’t pay back everything,” says Noel Shillito, a partner with law firm Shillito & Giske in Tacoma, Washington. “They pay back what you can afford to pay back” of unsecured debts, such as credit-card balances, medical bills, and signature loans.

“I might be in a plan for five years paying $400 a month, $600 a month. That’s the money left over after I’ve paid the basic living costs that I can pay into the plan — what we call our disposable income. Generally speaking, when you file a Chapter 13, you continue making your mortgage payments and your car payments.”

Impact of Previous Bankruptcies

If a debtor has already received one discharge under Chapter 7, that debtor must wait:

• Eight years to file a second Chapter 7 bankruptcy petition
• Four years to file a Chapter 13 bankruptcy case

Those time periods are calculated from the filing date of the first bankruptcy petition.

Find Legal Help for Filing Bankruptcy

Consumers must consider these issues and more when determining which chapter to file under for bankruptcy. The first step before making this decision is to speak with a law firm or an experienced bankruptcy attorney.

A bankruptcy lawyer may provide legal advice about bankruptcy law and discuss your bankruptcy options.