Eligibility Requirements for Filing Bankruptcy

Quick answer

• To file for bankruptcy, you must demonstrate financial hardship and meet specific income and asset tests.
• You’ll need to pass the “means test” to determine if you qualify for Chapter 7 (liquidation) or if Chapter 13 (reorganization) is your only option.
• You must complete mandatory credit counseling before filing and financial management education after filing.
• Certain debts are generally not dischargeable in bankruptcy, such as most student loans, recent taxes, and child support.
• You must have a valid Social Security number and be a US citizen or legal resident.
• Failing to meet these requirements can lead to your bankruptcy case being dismissed.

Who this is for

• Individuals facing overwhelming debt and considering bankruptcy as a solution.
• People who want to understand the basic criteria for filing and what types of bankruptcy they might qualify for.
• Anyone needing to assess if bankruptcy is a viable option for their financial situation.

What to check first (before you act)

Goal and timeline

Before diving into bankruptcy specifics, clarify what you hope to achieve. Is your primary goal to eliminate unsecured debt, stop a foreclosure, or reorganize your payments? Your timeline is also crucial. Bankruptcy is a legal process with specific timelines for filing, creditor notification, and discharge. Understanding your objectives will help you determine if bankruptcy is the right tool and which chapter (e.g., Chapter 7 or Chapter 13) best aligns with your needs.

Current cash flow

Accurately assess your monthly income and expenses. This is fundamental for bankruptcy eligibility, especially for the means test. You need to know how much money is coming in and where it’s going. This analysis will reveal if your income is too high to qualify for Chapter 7 or if you have enough disposable income to propose a viable repayment plan under Chapter 13.

Emergency fund or safety buffer

While bankruptcy can wipe out debts, it doesn’t magically create new assets. Assess if you have any savings or assets that could be protected or are necessary for immediate needs. Some assets are exempt from liquidation in bankruptcy, but understanding what you have is key. A small emergency fund can also help you manage unexpected expenses during and after the bankruptcy process.

Debt and interest rates

List all your debts, including the amount owed, the creditor, and the interest rate. This is vital for understanding which debts might be discharged, which might be reaffirmed, and which are non-dischargeable. High-interest debts, like credit cards and personal loans, are often primary targets for bankruptcy relief.

Credit impact

Filing for bankruptcy will significantly impact your credit score for several years. Understand that this is a consequence of the process, not a reason to avoid it if it’s the right solution for severe debt. You will need to plan for rebuilding your credit after bankruptcy.

Step-by-step (simple workflow)

Step 1: Determine your primary financial goal

• What to do: Clearly define what you want to achieve with bankruptcy. Do you need to eliminate credit card debt, stop a wage garnishment, or save your home from foreclosure?
• What “good” looks like: You have a clear, written statement of your main objective for considering bankruptcy.
• A common mistake and how to avoid it: Assuming bankruptcy will solve all financial problems. Avoid this by researching the types of debts that can and cannot be discharged.

Step 2: Gather all financial documents

• What to do: Collect pay stubs, tax returns, bank statements, credit card statements, loan documents, and any other relevant financial records from the last several years.
• What “good” looks like: You have a comprehensive folder or digital archive of all necessary financial information.
• A common mistake and how to avoid it: Forgetting to include all income sources or debts. Avoid this by making a detailed checklist of all required documents and reviewing it before your consultation.

Step 3: Complete mandatory credit counseling

• What to do: Find an approved credit counseling agency (check the U.S. Trustee Program website for a list) and complete an online or in-person counseling session. This must be done within 180 days before filing.
• What “good” looks like: You receive a certificate of completion from an approved agency.
• A common mistake and how to avoid it: Using an unapproved agency or completing the counseling too early. Avoid this by verifying the agency’s approval status and noting the completion date.

Step 4: Calculate your income for the means test

• What to do: Determine your average monthly income over the past six months. This includes wages, benefits, and any other income.
• What “good” looks like: You have an accurate calculation of your total household income for the specified period.
• A common mistake and how to avoid it: Excluding certain income sources or miscalculating the average. Avoid this by carefully reviewing IRS guidelines for income reporting.

Step 5: Pass the “means test”

• What to do: Compare your average monthly income to the median income for a household of your size in your state. If your income is below the median, you likely qualify for Chapter 7. If it’s above, you may need to complete further calculations to see if you have enough disposable income to repay a portion of your debts under Chapter 13.
• What “good” looks like: You understand whether your income qualifies you for Chapter 7 or points you toward Chapter 13.
• A common mistake and how to avoid it: Incorrectly applying the means test formulas. Avoid this by consulting with a bankruptcy attorney who can accurately perform the test.

Step 6: Identify your assets and exemptions

• What to do: List all your assets (property, vehicles, savings, investments) and research the available exemptions in your state to determine which assets you can protect.
• What “good” looks like: You have a clear understanding of which assets are vulnerable to liquidation and which are protected.
• A common mistake and how to avoid it: Misunderstanding or misapplying exemption laws. Avoid this by working with an attorney familiar with your state’s specific exemption rules.

Step 7: List all your debts

• What to do: Create a comprehensive list of all your creditors, the amounts owed, and the type of debt (secured, unsecured, priority).
• What “good” looks like: A complete and accurate list of all your financial obligations.
• A common mistake and how to avoid it: Omitting a creditor or debt. Avoid this by thoroughly reviewing bank statements, bills, and credit reports.

Step 8: Choose the appropriate bankruptcy chapter

• What to do: Based on the means test, your assets, and your goals, decide whether Chapter 7 or Chapter 13 is the best fit.
• What “good” looks like: You have selected the bankruptcy chapter that aligns with your financial situation and objectives.
• A common mistake and how to avoid it: Choosing the wrong chapter, which can lead to dismissal or an unfavorable outcome. Avoid this by discussing your options thoroughly with a qualified attorney.

Step 9: File the bankruptcy petition

• What to do: Complete the extensive bankruptcy forms accurately and file them with the appropriate bankruptcy court.
• What “good” looks like: Your petition is filed correctly and on time, initiating the bankruptcy process.
• A common mistake and how to avoid it: Filing incomplete or inaccurate paperwork, which can cause delays or dismissal. Avoid this by carefully reviewing all forms and seeking professional assistance.

Step 10: Attend the meeting of creditors

• What to do: Appear at the scheduled meeting (often called a 341 meeting) where a trustee and creditors can ask you questions under oath about your finances.
• What “good” looks like: You attend the meeting prepared to answer questions truthfully and accurately.
• A common mistake and how to avoid it: Missing the meeting or providing misleading information. Avoid this by preparing thoroughly with your attorney and being honest.

Step 11: Complete financial management education

• What to do: After filing your petition, complete a debtor education course from an approved provider. This is required to receive a discharge.
• What “good” looks like: You receive a certificate of completion for the debtor education course.
• A common mistake and how to avoid it: Failing to complete the course before the deadline. Avoid this by scheduling and completing the course promptly after filing.

Step 12: Receive your discharge

• What to do: Once all requirements are met, the court will issue a discharge order, which legally releases you from personal liability for most of your debts.
• What “good” looks like: You have received the official discharge order from the court.
• A common mistake and how to avoid it: Not understanding what debts are discharged or not meeting all post-filing requirements. Avoid this by carefully reviewing the discharge order and consulting your attorney.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
Not completing credit counseling	Your bankruptcy case will be dismissed.	Complete the counseling from an approved agency before filing and keep the certificate.
Miscalculating income for the means test	You might file under the wrong chapter or be denied Chapter 7 eligibility.	Carefully review IRS income definitions and consult an attorney to ensure accuracy.
Hiding assets or income	Your case can be dismissed, you could face fraud charges, and lose discharge.	Be completely transparent with your attorney and the court about all your financial dealings.
Omitting debts or creditors	The omitted debt will not be discharged and you will still owe it.	Thoroughly review all financial records and credit reports to ensure all debts are listed.
Incorrectly applying exemptions	You could lose assets you were entitled to keep.	Work with an attorney who is an expert in your state’s specific exemption laws.
Failing to attend the meeting of creditors	Your case will likely be dismissed.	Mark the date on your calendar, arrange transportation, and confirm meeting details with your attorney.
Not completing debtor education	You will not receive a discharge, meaning your debts won’t be eliminated.	Schedule and complete the course promptly after filing and submit the certificate on time.
Misunderstanding non-dischargeable debts	You may have unrealistic expectations about which debts are eliminated.	Research common non-dischargeable debts (e.g., student loans, recent taxes) and discuss with an attorney.
Lying on bankruptcy forms	Severe penalties, including fines, jail time, and denial of discharge.	Always provide truthful and accurate information on all bankruptcy documents.
Not seeking legal counsel	Increased risk of errors, procedural mistakes, and case dismissal.	Consult with an experienced bankruptcy attorney to navigate the complex process correctly.

Decision rules (simple if/then)

• If your average monthly income is below the median for your state and household size, then you likely qualify for Chapter 7 bankruptcy because the means test primarily focuses on income above this threshold.
• If your income is above the state median, then you will need to perform a more detailed means test calculation to see if you have enough disposable income to repay a significant portion of your debts, as this is a key factor in Chapter 7 eligibility.
• If you have significant disposable income after essential living expenses, then Chapter 13 bankruptcy may be a more suitable option than Chapter 7 because it allows you to repay debts over time through a structured plan.
• If your primary goal is to stop a foreclosure or repossession, then Chapter 13 bankruptcy may be necessary because it allows you to catch up on missed payments over a period of up to five years.
• If you have a large amount of non-exempt assets, then Chapter 7 might not be ideal because the trustee could liquidate those assets to pay creditors.
• If you have substantial unsecured debt (like credit cards and medical bills) and limited non-exempt assets, then Chapter 7 bankruptcy is likely a good option for you because it can discharge most of these debts.
• If you have incurred significant debt after a recent divorce or separation, then you may need to consult with an attorney, as the timing and nature of these debts can impact eligibility and discharge.
• If you have recently transferred assets or made significant payments to creditors, then you may face scrutiny from the bankruptcy trustee, as these actions can be considered “preferential transfers” or “fraudulent conveyances.”
• If you have filed for bankruptcy before, then the rules for subsequent filings can be more complex, and you may not be eligible for a discharge or may have to wait a specific period between filings.
• If you are a business owner, then the eligibility requirements and process for business bankruptcy (Chapter 7 or Chapter 11) are different and more complex than for individuals.
• If you are struggling with student loan debt, then understand that most student loans are not dischargeable in bankruptcy, though some specific programs or exceptions might apply in rare cases.

FAQ

What is the “means test”?

The means test is a legal requirement in the U.S. to determine if you qualify for Chapter 7 bankruptcy. It compares your income to the median income in your state. If your income is too high, you may be presumed to have the ability to pay your debts and be steered toward Chapter 13.

Can I keep my car if I file for bankruptcy?

Often, yes. If you have equity in your car that is within your state’s exemption limits, you can typically keep it by continuing to make payments or by reaffirming the debt. If you have significant equity above the exemption, you might lose the car in Chapter 7.

Are all debts dischargeable in bankruptcy?

No. Certain debts, like most student loans, recent taxes, child support, alimony, and debts incurred through fraud, are generally not dischargeable. The specific rules can be complex.

How long does bankruptcy stay on my credit report?

Chapter 7 bankruptcy stays on your credit report for up to 10 years from the filing date. Chapter 13 bankruptcy stays on your credit report for up to 7 years from the filing date.

What’s the difference between Chapter 7 and Chapter 13 bankruptcy?

Chapter 7 is a liquidation process where non-exempt assets are sold to pay creditors, and remaining eligible debts are discharged. Chapter 13 is a reorganization process where you repay a portion of your debts over 3-5 years through a court-approved payment plan.

Do I need a lawyer to file for bankruptcy?

While not legally required, it is highly recommended. Bankruptcy laws and procedures are complex, and an attorney can help you navigate the process, protect your assets, and ensure you meet all eligibility requirements and deadlines.

What happens to my retirement accounts in bankruptcy?

Retirement accounts like 401(k)s and IRAs are generally protected from creditors in bankruptcy, provided they meet certain legal requirements. This means you usually don’t lose your retirement savings.

What this page does NOT cover (and where to go next)

• Specific details of state-level exemption laws, which vary significantly.
• The process for business bankruptcy (Chapter 7, 11, or 12).
• Strategies for managing or resolving debt outside of bankruptcy.
• The long-term implications of bankruptcy on future credit and financial opportunities.
• Detailed analysis of non-dischargeable debts and potential exceptions.