How Much Debt Do You Need to File Bankruptcy?

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Published on October 28, 2020

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Are you late on paying your bills? Maybe you’re being hounded by debt collectors? Is your financial situation stressing you out? Being in this situation could make you consider filing for bankruptcy. You’re probably thinking that bankruptcy will solve all of your money problems and maybe it will. However, there are many different questions that may be floating in your mind.

What happens if I declare bankruptcy? Do you need to have a minimum or maximum debt before you could file for bankruptcy? When is the right time to file for bankruptcy? This article will discuss these points so read on if you are interested in learning more about the answers to these questions,

Should I file for Chapter 7 or Chapter 13 Bankruptcy?

If you’ve never filed for bankruptcy before, it is important to understand the two most common types of bankruptcies in the United States and how bankruptcies work. Depending on your personal financial situation, you can either file a Chapter 7 or a Chapter 13 bankruptcy. In 2019, there were over 733,000 bankruptcy filings in the United States, and 62% of these were filed under Chapter 7 bankruptcy, and 38% under Chapter 13.

What is a Chapter 7 Bankruptcy?

What is the difference between Chapter 7 and Chapter 13 bankruptcy? 

A Chapter 7 bankruptcy usually lasts for 3 to 6 months and with this type of bankruptcy, you can discharge most, if not all, of your unsecured debts (credit card, medical bills, personal loans, etc.). The downside is that you will lose your properties like your house or car so you can cover some of your debts. 

Depending on the state you live in and its bankruptcy laws, it is still possible to keep some of your property even if you file for bankruptcy if these fall under exempt property. Another disadvantage is that a Chapter 7 bankruptcy will not help you if you have debts that cannot be discharged such as child support payments, student loans, taxes, and other federal payments.

What is a Chapter 13 Bankruptcy?

A Chapter 13 bankruptcy, on the other hand, could last for three to five years. Rather than erasing your debts, a Chapter 13 bankruptcy is more of a debt reorganization. Your monthly payments will be restructured and you will be given more time to pay your debts over a given period of time. The advantage of a Chapter 13 bankruptcy is that while it may not erase your debts, you can still keep your properties especially if they are not exempt from repossession. After the repayment period, it is also possible to have the remaining debts discharged.

Most people prefer Chapter 7 over Chapter 13, especially if they have exempt properties under state laws because it is a much quicker process and the debt relief is immediate. You won’t have to pay your unsecured debts any longer as they will be erased. If you want to learn more about this topic, read our separate post about the pros and cons of filing a Chapter 7 and Chapter 13 bankruptcy.

How Much Do You Have to be in Debt to File for a Chapter 7 or Chapter 13 Bankruptcy?

Are you not sure whether your amount of debt qualifies you to file for bankruptcy? Well, the good news is that there is NO MINIMUM amount to file for a Chapter 7 or a Chapter 13 bankruptcy. Many people may not be aware of this but the laws do not specify any minimum amount.

In terms of the maximum amount of debt, there is also NO MAXIMUM amount of debt to file for a Chapter 7 bankruptcy. This means that whether you have $10,000 or $100,000, you can file for a Chapter 7 bankruptcy. On the other hand, there is a maximum amount of debt that you can organize if you are filing a Chapter 13 bankruptcy. The limit amount changes every year. In 2020, the limit for unsecured debts is $419,275 while the limit for secured debts (mortgage, car loans, etc.) is $1,257,850.

However, not anybody can file a Chapter 7 bankruptcy. Just because you don’t want to pay your credit card bills anymore does not mean that you can easily file for bankruptcy. You have to pass the bankruptcy means test to qualify for a Chapter 7 bankruptcy. To pass this test, your monthly income has to be below the median family income in your state.

If your income is higher, the only way you could qualify is if you prove that your expenses are higher than your income or that you won’t have any money left after paying your bills to pay your debts. If in any case you do not qualify for a Chapter 7 bankruptcy, then you could try to file a Chapter 13 to see if this could help relieve your debt problems.

5 Things To Consider Before Filing For Bankruptcy

Filing for bankruptcy is a major financial decision. There are many different reasons for personal bankruptcies. Maybe you lost your job or maybe you’ve racked up a lot of credit card debts that you are having a hard time paying your bills and expenses. Whatever your reason may be, filing for bankruptcy should be your last resort.

If you are unsure whether you should file for bankruptcy or not, you can review the following points to see whether this is the right time for you to file a bankruptcy.

1. Are You Qualified to File a Chapter 7 or Chapter 13 Bankruptcy?

As mentioned in the earlier section, you have to pass the “bankruptcy means test” before your bankruptcy filing will be approved. But how does this “means test” work exactly? Here is an example of how to calculate whether you will pass the Chapter 7 bankruptcy means test.

For example, if you live in California, the median family income in your state for April 2020 to April 2021 for a family of two people is $79,271. This means your monthly income has to be less than $6,605 a month to file for bankruptcy. If your income is lower than the median income, this means you pass the test.

If your income is higher than the median amount, you can still do a Chapter 7 Means Test where you deduct all of your expenses such as your taxes, housing expenses, child care, utilities, etc. After deducting all of your expenses, you will be able to see whether you have disposable income left to pay your debts. If you don’t have much left, you may qualify for a Chapter 7 bankruptcy. Otherwise, your next available option is to file a Chapter 13 bankruptcy. Again, you have to meet the maximum limit amount of debt that you can reorganize for a Chapter 13 bankruptcy.

If you are interested to know whether your income is below or above your state’s median income, you can check out this median income table that covers bankruptcy filings from November 1, 2020 onwards. Note that these figures are constantly being updated so you have to double-check the website for the updated figures.

2. What Types of Debts Do You Have?

Unfortunately, not all kinds of debts can be eliminated even if you file for a bankruptcy. If you’ve heard that filing a Chapter 7 bankruptcy will erase all of your debts, this could be true if all your debts are unsecured debts. Unsecured debts are debts that you incurred without any collateral such as credit card bills, medical bills, and personal loans. If you have secured debts like a car loan or a mortgage, you would have to give up these assets.

Now, if you have non-dischargeable debts then there is no way you can get out of paying these debts even if you file for bankruptcy. Examples of debts that cannot be discharged include student loans, federal and state taxes, child support, debts from fraud or embezzlement, etc.

Carefully assess what kind of debts you have. Are all your debts unsecured debts that can be erased through a Chapter 7 bankruptcy? If most of your debts are nondischargeable then bankruptcy might not be the solution for you if you’ll end up paying most of your debts anyway even after filing a Chapter 7.

3. Are You at Risk of Losing Your Assets?

This consideration is for people whose properties are non-exempt from repossession. If your state does not offer much protection about being able to keep your home, your car or your other essential assets after filing for bankruptcy, you could file for a Chapter 13 bankruptcy to reorganize your debts. This way, your debts will not be immediate and you will have a repayment plan so you will be able to manage paying your debts much better.

If most of your debts are credit card bills and you do not have any major assets like a house or a car that you would like to keep, then a Chapter 7 bankruptcy may be the better option for you.

4. Is Bankruptcy Your Last Resort?

When you’re drowning in debt, filing for bankruptcy may seem like the easy way out. This is especially true if you have lost your job or you’re struggling to make ends meet every month. Many people make the hasty decision to file for a Chapter 7 bankruptcy just to get instant relief from all the financial stress and avoid exhausting debt collectors.

It is very important, however, to look into the future after you file for bankruptcy. Will you be able to cover your expenses after your debts are discharged? Or will you still be out of pocket? The reason why you should ask yourself this is because there may be other options to cover your debt payments instead of a bankruptcy filing. For example, you can explore ways on how to make money on weekends or how to make money without a job.

When you file a Chapter 7 bankruptcy, you cannot file again until after 8 years. Yes, that’s 8 long years. So if the amount of your debt is not that high, you might want to save that Chapter 7 filing for future use just in case you get into worse circumstances.

For example, let’s say you lost your job and because of this you were unable to pay the monthly minimum payments for the $3,000 credit card debt that you had. Because you already missed a few months, you started getting calls from debt collectors. So what you did was file a Chapter 7 bankruptcy to discharge this $3,000 debt so you can start anew. Let’s say that your debt was discharged successfully so you were left with zero credit card debts.

Four years after, you found yourself in a deeper hole. You started to incur more debts amounting to $10,000 because of financial emergencies you were not able to anticipate. Because of your low credit score, you were paying high interest when getting new credit and this made your debts higher. If you are unable to pay your debts this time, the bad news is that you cannot file for another Chapter 7 bankruptcy. You would have to wait four more years before you can do that.

5. Can You Live with the Consequences of Bankruptcy for 7 to 10 Years?

Filing for bankruptcy has a major impact on your financial dealings. Chapter 13 bankruptcy stays in your credit report for 7 years while a Chapter 7 bankruptcy will stay in your credit report for 10 long years. While there may be ways to remove bankruptcy from your credit report early, the chances of this happening is very minimal.

After filing for bankruptcy, your credit score is likely to drop between 100 to 200 points. The higher your credit score, the higher the drop. A lower credit score means a higher interest on loans and new credit. If you’re looking for a new job or venturing into a new business venture, having a bankruptcy in your records could impact this process.

Think Before You File

Before you file for bankruptcy, exhaust every possible option to pay for your debts. Bankruptcy should be the last on your list of solutions. It is not the easy way out as there are attached consequences when you file for bankruptcy.

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