When the bankruptcy laws were changed in 2004, the number of new Chapter 7 bankruptcies plummeted, as the new rules barred many people from entering the Chapter 7 program. Now that unemployment is over 10 percent, U.S. bankruptcy filings rose 33 percent in the third quarter to the highest number since 2005. It’s my suspicion that the increase is not only due to increase financial hardship, but also due to a drop in consumer income which allows many to qualify for bankruptcy.

The bankruptcy numbers are staggering:

• There were 388,485 filings in the July-to-September period, up from 292,291 a year earlier and up 2 percent from the second quarter’s 381,073, according to data released Wednesday by the Administrative Office of the U.S. Courts.
• Consumer filings rose 33 percent to 373,308 from 280,787 a year earlier, while business filings increased 32 percent to 15,177 from 11,504.
• For the first nine months of 2009, there were 1,100,035 bankruptcy filings, up 35 percent from a year earlier. The 45,510 business bankruptcies in that period surpass the 43,546 total for the entire 2008 year.

The biggest barrier to qualification for bankruptcy is the bankruptcy court’s calculation of your income, which is averaged it over 2 years. If you’re unemployed, obviously, your income is reduced. The lack of income makes it easier to pass all of the bankruptcy Means Tests, including the income qualification. There are three “tests”;

1. Do you make too much money? The limits are based on IRS charts, but as an example:
   • In Arizona, a single person cannot make more than $37,492, and a family of four cannot make more than $61,102
2. There are two tests for your ability to repay a portion of the debt after a bankruptcy court analysis of your net income:
   • Do you have excess monthly income of more than $166.66/month to pay $10,000 of debt over 5 years?
   • Do you have excess income of greater than $100/month to pay over the next 60 months at least 25% of your unsecured debt?

If you cannot pass the Means Test, but still want to file for bankruptcy, you must file for a Chapter 13 bankruptcy. Chapter 13 bankruptcy requires that consumers repay their debts under a court ordered program; Chapter 7 wipes out all of a consumer’s debt.

I don’t know about you, but I have several friends with college degrees and 10+ years work experience who’ve been out of work for over a year. Being out of work so long can cut your income figures dramatically, allowing a family member to suddenly qualify for bankruptcy.

Do you have a personal experience with bankruptcy that you want to share? Tell us about it by leaving a comment!

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