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How Much Do You Have To Be in Debt To File Chapter 7?

8 min read
Philip Ahn, Attorney

by Philip Ahn, Attorney

Being in debt can become worrisome, especially when those debts lead to filing bankruptcy. Figuring out how much you have to be in debt to file Chapter 7 is an essential first step in your journey. 

There isn’t a minimum amount of debt required to file for bankruptcy relief. Some bankruptcy chapters do have a maximum amount of debt that you can’t exceed, but minimums don’t exist. While your debt is an essential factor to consider, there are other important factors involved in determining whether a bankruptcy filing is in your best interest. 

Learning some basic information about Chapter 7 helps you make the best decision about the debt relief options available to you. The drawbacks to filing for bankruptcy, in cases when you shouldn’t, could be devastating. Let us put you in touch with an experienced bankruptcy lawyer in your area to determine if and when filing for bankruptcy is best for you. 

Learn more about debt and income qualifications for bankruptcy below. 

What Is Chapter 7 Bankruptcy?

Chapter 7 of Title 11 in the U.S. Bankruptcy Code allows for asset liquidation to pay off creditors. When you file Chapter 7, a bankruptcy trustee is appointed to liquidate your nonexempt assets. When the funds raised by your assets’ liquidation are depleted, then the remainder of your debts are discharged. 

The absolute priority rule stipulates how debts are paid.  Unsecured debts are separated and paid first. Unsecured priority debts include tax debts, child support, and personal injury claims. 

Secured debts, which are those debts backed by collateral like a mortgage, are paid next. Nonpriority unsecured debts get paid last. If there aren’t enough funds remaining to pay those, then the debts are paid proportionately. 

You have to meet specific criteria to be eligible to file Chapter 7. Debtors won’t be allowed to apply if they have had a Chapter 7 bankruptcy discharged in the preceding eight years. Applicants also have to pass a means test. Read more below about the eligibility requirements necessary for filing Chapter 7. 

What’s the Minimum Amount of Debt To File Chapter 7? 

The total amount of your debt is a crucial factor to consider before filing Chapter 7. There are currently no threshold amounts for Chapter 7 bankruptcy eligibility.  Some chapters of bankruptcy do have debt limits, but there is no such thing as a debt minimum. 

Is There an Income Limit for Filing Chapter 7?

Chapter 7 income limits were added to Chapter 7 bankruptcy proceedings in 2005. That was done because Congress worried about abuse of the bankruptcy process from filers who could afford to pay off their debts. Congress also added a credit counseling requirement for anyone filing any type of bankruptcy to help prevent abuse. 

The bankruptcy means test calculation will determine if debtors can afford to pay a portion of their consumer debts with a Chapter 7 bankruptcy. If your annual income is less than the median income in your state, then you qualify for Chapter 7. If your income is higher than the median household income, then you may not be eligible. 

What Is the Means Test?  

The means tests use Forms 122A-1 and 122A-2 to calculate your disposable income. If your Form 122A-1 shows your income is larger than the median, then you must file Form 122A-2. Form 122A-2 is the actual “means test,” and those documents are used to determine how much money you have available to pay off your debts.

If Form 122A-2 indicates a presumption of abuse, you could make too much money for Chapter 7. You may qualify for Chapter 7 if there are special circumstances that have reduced your ability to pay off your debts.

What Happens When You File Chapter 7? 

Once you file for Chapter 7 bankruptcy, you are assigned a number and a bankruptcy trustee.  Bankruptcy trustees are responsible for conducting your meetings with creditors. Bankruptcy trustees also oversee your bankruptcy filing, review your bankruptcy documentation, and seek to verify all of your information. 

Your automatic stay period begins immediately once you file. Automatic stays put an end to the unsettling calls, emails, and other actions by creditors. After your automatic stay goes into effect, creditors can no longer take collection actions against you or garnish your wages. 

Don’t You Lose Everything When You File Chapter 7?

Chapter 7 bankruptcy does drastically affect your life. After filing for Chapter 7, your property goes into an estate held by your Chapter 7 bankruptcy trustee. In most cases, Chapter 7 filers don’t lose everything because much of their personal property is likely going to be exempted.

Chapter 7 does remove specific property categories from liquidation if they are necessary to maintain a home or business. However, your bankruptcy trustee does sell all the non-exempt remaining assets for repayment of debts owed to creditors. 

How Much Does It Cost To File Chapter 7 Bankruptcy?

Chapter 7 bankruptcy costs add up fast and include the following:

  • Court filing fees 
  • Credit counseling course
  • Bankruptcy lawyer fees

The Chapter 7 filing fee is $338. It must be paid by money order or cashier’s check and is due when you file for Chapter 7. The total cost of your Chapter 7 bankruptcy depends on the particulars of your financial situation. 

Filers with incomes at  150% below the poverty line can apply to have their fees removed. If you can’t apply for these waivers, you could be eligible to pay your filing fees in installments.

What’s the Difference Between Chapter 7 and Chapter 13 Bankruptcy?

Chapter 7 bankruptcy focuses on the liquidation of property to pay off your debts, while Chapter 13 focuses on reorganizing your finances. Individuals can file Chapter 7 or Chapter 13, but businesses can only file Chapter 7. 

Chapter 13 sets it’s eligibility restrictions at $419,275 of unsecured debt or $1,257,850 of secured debts. Anyone who fails the Chapter 7 means test is eligible to file Chapter 13. The Chapter 7 discharges can happen in three to five months compared to the three to five years it often takes to finalize a Chapter 13 discharge. 

In Chapter 7, trustees are allowed to sell all eligible properties to pay off a filer’s debts. Chapter 13 is different because debtors can keep all their stuff and only have to pay unsecured creditors an amount equal to the value of their nonexempt assets. 

When Can I Expect My Credit To Recover? 

Chapter 7 bankruptcy cases remain on your credit report for up to ten years. However, Chapter 7 doesn’t prevent you from rebuilding your credit. After your bankruptcy trustee processes your claim,  in just a few months you’ll be able to start rebuilding your credit immediately.

It’s possible to achieve a higher credit score after bankruptcy because you’ll have control of your debts. Making payments on time with more disciplined credit usage will be pivotal to recovering your credit after bankruptcy. 

Who Should File Chapter 7? 

Each business or individual situation is different. Therefore, it’s imperative to consult with a Chapter 7 bankruptcy professional before proceeding. Generally, it is advantageous for you to file Chapter 7 in the following instances: 

  • You have more than $10,000 of dischargeable debt 
  • Your credit score is already below 600
  • You don’t possess expensive assets 
  • You’re struggling to maintain your debt payments and keep up with the cost of living
  • You’re concerned about wage garnishment
  • You’re in danger of being sued for your debts 
  • You pass the means test because you earn under the median income in your state
  • You don’t think you’ll be able to pay back your debts over the next five years

Who Should Not File Chapter 7? 

Chapter 7 bankruptcy can be complicated, so sometimes it’s best to wait before filing and seek alternatives. You may want to consider other options in the following instances:

  • You’re relying on your credit cards to survive
  • You’ve made large purchases in the last six months
  • You paid back or transferred your property to a family member or friend in the last year
  • You’re suing someone or planning to sue someone
  • You owe your landlord money, and you don’t intend on moving
  • You owe money for a car loan on a vehicle that you’d like to keep
  • You expect your financial situation to grow worse

You can only file Chapter 7 bankruptcy once every eight years. It’s essential to file at the right moment and avoid filing if you know you are likely to acquire more debt.

Contact Us Today To Learn About Our Affordable Pay-As-You-Go Bankruptcy Services

Chapter 7 can become confusing and expensive. It’s crucial to understand your best options and consult professionals who can support your financial goals. Unfortunately, most bankruptcy lawyers won’t even start on your Chapter 7 claim until they have received all of your payments in full. 

Unbundled bankruptcy lawyers are flexible and offer affordable pay-as-you-go options so they can start immediately.  Our Network of Chapter 7 Lawyers also offers virtual consultations that help you begin the bankruptcy proceedings immediately. 

Click here to receive a free consultation with an Unbundled Legal Help Chapter 7 bankruptcy lawyer in your area today.

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