What Are the Requirements for Bankruptcy?

Who Qualifies for Bankruptcy?

The single greatest indicator of your ability to qualify for Chapter 7 or Chapter 13 bankruptcy is a means test that evaluates your income and debts and determines whether it's possible for you to make full or partial repayment to your creditors. The outcome of that test can tell you if you qualify for bankruptcy and, if so, whether Chapter 7 or Chapter 13 is your better option.

Chapter 7 Bankruptcy Requirements

With Chapter 7 bankruptcy, your personal assets may be sold (with certain exceptions) and the proceeds distributed among your creditors. Chapter 7 requires the following:

• If your average monthly income over the last six months is less than the median income for a similarly sized household in your state, you are considered eligible for Chapter 7 protection. Otherwise, a means test must find that your disposable income is insufficient to enable partial repayment of your unsecured creditors. (If the means test determines you can afford partial repayment, you must consider pursuing Chapter 13 bankruptcy instead of Chapter 7.)
• You can't have filed for Chapter 7 bankruptcy in the previous eight years.
• You can't have filed for Chapter 13 bankruptcy in the previous six years.
• If you attempted to file for Chapter 7 or Chapter 13 bankruptcy but your case was tossed out, you may be required to wait 181 days or more before refiling.
• Except under emergency circumstances, such as the lack of available counselors, you must complete a credit counseling course from an approved credit counseling agency before you file for bankruptcy, and a debtor education course after you file.
• Even if you meet all other bankruptcy requirements, a judge could dismiss your case if the court finds you're attempting to defraud creditors—such as by running up credit card charges with the intent of using bankruptcy to avoid paying off those debts.

Chapter 13 Bankruptcy Requirements

Chapter 13 bankruptcy can allow you to keep your home or other assets and typically establishes a three- or five-year payment plan to compensate creditors. Its requirements differ from the requirements for Chapter 7 bankruptcy in the following ways:

• Your income must be sufficient to cover monthly payments called for in a bankruptcy plan agreed upon by you, a court-appointed trustee and a bankruptcy judge.
• Your unsecured debts (such as credit card balances, most personal loans and medical bills) must be less than $526,700, and your secured debts (such as mortgages and car loans) must be less than $1,580,125. These dollar limits apply until April 1, 2028; debt limits change every three years.
• You can't have filed for Chapter 7 bankruptcy within the past four years or filed a previous Chapter 13 case within the last two years.
• If you attempted to file for Chapter 7 or Chapter 13 bankruptcy and your case was tossed out, you may need to wait at least 181 days before refiling.
• You must provide proof that you filed federal and state income tax returns for the past four years.
• As with Chapter 7 bankruptcy, you typically must finish a pre-bankruptcy credit counseling course as well as a pre-discharge debtor education course before your debts are discharged.

Learn more: Chapter 7 vs. Chapter 13 Bankruptcy

Where to Get Professional Advice About Bankruptcy

The bankruptcy process can be daunting. The legal process can seem complicated and intimidating, and discussing your financial distress can be difficult. Fortunately, assistance is available from professionals who can help without making you feel awkward or judged.

• Certified credit counselor: A nonprofit credit counseling agency can help you evaluate and analyze your debts, income and assets, and help you decide how to move forward. That could mean working with your creditors to devise a debt management plan that helps avoid bankruptcy. But if bankruptcy turns out to be your best option, a credit counselor can offer guidance on how to proceed and on completing the credit education program that's a prerequisite for both Chapter 7 and Chapter 13 bankruptcy. The U.S. Department of Justice maintains a list of federally approved credit counseling agencies.
• Bankruptcy attorney: You don't have to hire a lawyer to file bankruptcy, but working with a bankruptcy attorney could be wise. This is particularly true if you're pursuing Chapter 13, which typically requires negotiating a repayment plan and entails years of legal obligations, but a lawyer also can be helpful if you're seeking Chapter 7 protection. Many bankruptcy attorneys offer a free initial session that can help outline your best options.
• Financial advisor: A financial advisor might be helpful before and after a bankruptcy filing, with guidance on protecting your assets and completing a Chapter 13 repayment plan.

How Does Filing for Bankruptcy Affect Your Credit?

Bankruptcy has deep, long lasting negative consequences for your credit:

• A bankruptcy is recorded on your credit reports and remains there seven years in the case of Chapter 13 or 10 years for Chapter 7, dated from the month you first file for bankruptcy protection.
• Lenders consider bankruptcy a major red flag when evaluating your creditworthiness. Some may be willing to issue you a loan or other credit only after several years pass following a bankruptcy filing, but others refuse to lend to anyone with a bankruptcy on their credit reports.
• Bankruptcy can have lasting negative effects on your credit scores, compounding the damage done by the missed payments that typically precede a bankruptcy filing.

Tip: While bankruptcy can have a serious negative impact on your credit, its effect lessens over time, especially if you take solid steps to rebuild your credit.

How to Rebuild Your Credit After a Bankruptcy

The key to rebuilding damaged credit after bankruptcy is to establish a pattern of timely debt payments. This can be challenging when a recent bankruptcy results in canceled credit accounts and leaves lenders wary of issuing you a new loan or credit card. Nevertheless, there are steps you can take immediately following bankruptcy discharge that can help you begin to restore your credit.

• Become an authorized user. If a friend or relative with a strong credit history lets you become an authorized user on their credit card account, they effectively share their solid payment history with you. You'll receive a card with your name on it that's affiliated with their account and can benefit from positive credit card use.
• Try a secured credit card. With a secured credit card, you put down a cash deposit that serves as some or all of your borrowing limit. If you fail to keep up with your payments on the card, the lender can keep your deposit, but if you repay the charges you make on time, those payments will enhance your credit.
• Consider a credit-builder loan. With a credit-builder loan, you borrow a small sum (usually up to $1,000), and the money is placed in a special savings account you cannot touch until you've repaid the loan in full. When you're done, which typically takes six to 24 months, the money is yours and that payment history can benefit your credit scores.
• Try Experian Boost^®ø. This optional feature of a free Experian account lets you share information on your recurring nondebt payments, such as eligible rent, insurance, utility and streaming service subscriptions, and have on-time payments reflected in your Experian credit reports. This could lead to immediate increases in FICO^® Scores^Θ based on Experian credit data.

Learn more: How Soon Will My Credit Score Improve After Bankruptcy?

The Bottom Line

If your debts are becoming unmanageable, bankruptcy could provide a fresh start, albeit at a steep cost in terms of your credit and potential loss of assets. If you qualify and pursue bankruptcy protection, rebuilding your finances and credit standing may be slow at first, but steady improvement is possible and eventually you can get back on solid footing. You can track your progress by regularly checking your FICO^® Score and credit report for free from Experian.