What Qualifies a Person for Bankruptcy?
Qualifying for Chapter 7 Bankruptcy — Net Monthly Income in the Red (or close to it)
If you are filing a chapter 7 then your net monthly income cannot exceed (by much) your regular monthly expenses. Most people who file chapter 7 are either breaking even (without counting the charge card debt or other debts that will be discharged) or are in the red.
Qualifying for Chapter 13 Bankruptcy — Net Monthly Income is Positive, but Can’t Pay Mortgage
The opposite is true for filing a chapter 13. In this situation you have to show that you are still solvent but need to restructure your debt in order to pay all or some portion of it over the next 3 to 5 years.
However there are other hurdles to overcome which include an inquiry into the Debtor’s household income (whatever the source) and how that compares to the state median standards set by the IRS. This is the first threshold to overcome if trying to file a chapter 7.
This has been one of the most tangible effects of the Bankruptcy Amendment Act of 2005 which has forced some “high income” debtors into 13’s rather than 7’s. Most Chapter 13’s are still filed to cure mortgage arrearages in order to stop a pending foreclose and require the lender to accept the catch up payments that will be made through the Chapter 13 Plan.
If not for this, the lender has to right to accelerate the note and refuse further payments unless the entire arrears is paid at once. Most people cannot do that once they have fallen behind on the mortgage. Chapter 13 puts control back in the Debtors hands. The remaining unsecured creditors also have to get paid something through the plan, but not necessarily depending on a hypothetical Chapter 7 liquidation analysis and available disposable income!