What Are Your Options When You Don’t Qualify for Bankruptcy
Maybe your income is too high compared to your debts, or you have too many assets that could be used to pay off the debt. Find out if you qualify for bankruptcy today.
Do You Qualify For Bankruptcy?
Bankruptcy could be an option for you if you are burdened by debt, but first you have to qualify. If you don’t meet certain criteria, you may have to consider alternative debt-relief solutions. Here are some alternatives that you will not hear about through the bankruptcy courts.
First, let’s look at what factors could lead to a person to not qualify for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 bankruptcy, which is the discharge of debt, requires what the courts call a “means test.” This assesses if you truly lack the finances or assets to pay your debts. The means test takes into account your income, expenses, family size, and where you live.
What is the means test and how do you qualify?
The means test is a formula that is used to decide if you are eligible for Chapter 7 bankruptcy and used to determine if you could afford to pay off at least a portion of your debts. The means test is mainly testing the ability of the debtor to pay off the creditor(s).
The means test has two steps:
- Is your current monthly income more than census bureau median income in that state?
If your monthly income for the past 6 months, not including the filing month, is lower than the median income in the state, then you have already passed the means test. However, if you have income higher than the median income, you will have to go to step 2 of the means test.
- If part two of the means test analysis reveals that you don’t have enough disposable income to pay at least 25% of your unsecured non-priority debts over five years, then you remain eligible for Chapter 7 bankruptcy.
To pass step 2 of the means test, you would have to record your expenses: including food, clothing and other items, out of pocket health care costs, housing and utilities, and transportation. After deducting these basic expenses, some expense deductions can be increased if the filter can show that thier actual, reasonable and necessary expenses.
If your income is below the Chapter 7 income limit, you qualify. If it’s not, you likely will not qualify and will be sent to Chapter 13. But if the court determines you have enough money to repay your debts, you will not be approved for Chapter 13 either. Which leads to alternatives to bankruptcies.
Other factors that might mean you don’t qualify when filing include:
- You can’t afford or don’t want to pay for a lawyer, which leads to complications in filing.
- You can’t afford the filing fees.
- You fail to attend mandatory credit counseling.
- You were not honest in your filing, meaning you tried to defraud the court.
- A bankruptcy was discharged within the last four years under Chapter 7.
- A bankruptcy was discharged within the last two years under Chapter 13.
Consider Chapter 13 Repayment Plans
In Chapter 13 Bankruptcy, you agree to a 3-5 year payment plan. Chapter 13 bankruptcy is the reorganization of debts for individuals. In cases filed between April 1, 2022 and for the next three years, total unsecured debts cannot exceed $465,275 or $1,395,875 in secured debt.
Chapter 13 is beneficial if you have property you want to keep and have income high enough to pay off the debts through a payment plan. The payment plan will affect your monthly budget, and because Chapter 13 is more complicated than Chapter 7, it almost always requires an attorney, which means paying legal bills. However, many attorney fees are rolled into the payment plan, which lessens the immediate burden.
Alternatives To Chapter 7 And Chapter 13 Bankruptcy
- Attempt to Negotiate Better Terms – Nothing is guaranteed, but if you can explain and provide documentation of your current financial hardship and agree to a repayment schedule, lenders may be willing to work with you. Understand that if you get a reduction but fail to keep up with the monthly payments, you put yourself at risk of the agreement defaulting and the debt will add up again. If a lender makes an arrangement with you, take advantage and make the payments, in full and on time.
- Increase Your Income The gig economy is everywhere, and available to almost anyone, regardless of skills. If you have a clean and reliable car you can drive for one of the ride-sharing companies such as Uber or Lyft or sign on with one of the home-delivery services, such as InstaCart, DoorDash, Grubhub or UberEats. You can find side gigs as a writer, editor, programmer, marketer, tutor, ect. You can get started by checking out the opportunities listed by freelance jobs websites, such as Flexjobs, SolidGigs, Fiverr, Upwork, CloudPeeps, Freelancer and/or Indeed.
- Use Your Savings to Pay Off Debts – When bankruptcy is an option, your debt has reached emergency levels. That is the time to use your emergency funding, such as the funds currently in your savings account.
- What is the interest I am earning on my savings?
- What is the interest I am paying on my credit cards?
- What are the finance charges I am paying every month?
- Can I formulate a budget that will allow me to earn enough money while also using savings to pay debt?
- Is my job steady enough that I can give up some of the emergency funds to pay debt?
- How far would I be if I negotiated a better arrangement with the credit card companies and used some savings to help pay it?
- Use Your Home’s Equity – Home equity is the difference between the market value of your home and the amount you owe on it. If you are a homeowner, this may be a good option for you. Gaining that equity would mean refinancing your home, which means setting up a new loan that includes what you owe and a “cash out” portion you would use to pay debt. This means qualifying for another loan and going through the process. It might not work for everyone, but if it does work, it can be a solution to resolving your current debt.
- Use Your 401K or Retirement Fund – Anyone with a well-established 401K could borrow from those employer-sponsored retirement accounts to pay off debt. Carefully assess this option. Many consider it a very poor choice for paying off debts. This is especially not the best idea for those close to retirement. If you are relatively young, you have many years to rebuild the account. If you are close to retirement, you are cheating yourself out of money you may need when you retire.
- Budget to Cut Out Excess Spending- Honest assessment of spending and costs can almost always find ways to save and solve the issue of debt. Make a list of all expenses. The first step is to eliminate spending where there is no need to spend, such as dining out frequently.
- Consider Debt Management – A debt management plan could be worked out after speaking with a credit counselor. This plan reduces the interest rate on credit card debt to somewhere around 8%, and gives you a time period of 3-to-5 years to pay off that debt. The savings can be significant, and if you apply that savings to the debt you will pay the total off even quicker. Factors must be considered. As with almost any financial arrangement these days, there are those in the world who will try to scam you. Make sure you use a legitimate counselor. These plans also require you to make payments in full every month.
- Debt Consolidation – Debt consolidation is the gathering of multiple credit card debts into one pile, and taking one big loan, typically from a bank, credit union or online lender, to pay off that amount. Making just one payment simplifies the process and if you have a good credit score, you might qualify for a low-interest loan. However, that is unlikely if you’re considering bankruptcy, but it’s still worth checking out. Though this loan puts debt into one loan to one creditor, you’ll still owe the same amount, just to another entity.
- Debt Settlement – With debt settlement, a consumer pays less than what is owed. The payment is made via a lump sum after two or three years of saving for an amount large enough to make an offer. It requires a debt settlement company negotiating with one or more creditors to get them to agree to settle the debt for less than what is owed.
- What does a Chapter 7 “means test” take into account?
The means test takes into account your income, expenses, family size, and where you live.
- Does everyone qualify for bankruptcy?
No. Not everyone can qualify for bankruptcy. In order to qualify, one must lack the finances and assets needed to pay off their debts.