Bankruptcy debtors must usually choose between a Chapter 7 or 13.
A Chapter 7 bankruptcy usually concludes quickly— a matter of 3 or 4 months. A chapter 13 requires payments to a bankruptcy trustee for 3 to 5 years.
Eligibility for a Chapter 7 bankruptcy includes three tests:
1. Interval since the last bankruptcy discharge
2. Income below the cap (Means Test)
3. Asset equity
An interval of 8 years must pass between a successful chapter 7 bankruptcy and another chapter 7 bankruptcy. The required interval differs if the prior bankruptcy was a chapter 13.
Debtors in bankruptcy are compared to households of the same size in the state: if household income is equal or less than the median for such size households, the income test is passed.
For example, say the median income for a household of four in the state of Missouri is $69,832.
A husband and wife, with two minor children in the home, and household income of $64,500 pass the income test and qualify for a Chapter 7.
A husband and wife, with two minor children in the home, but with household income of $85,000, initially fail the income test and probably do not qualify for a Chapter 7 bankruptcy, a Chapter 13 bankruptcy may be their only choice.
Debtor's homes, motor vehicles and some other assets are not always completely protected in a Chapter 7 bankruptcy. For example, only the first $15,000 of equity in the debtor’s home is protected for Missouri bankruptcy joint debtors. If the debtors have $35,000 of equity in their home, the home would not be fully protected in a chapter 7 bankruptcy: to preserve it they might have to file a Chapter 13 bankruptcy.