How Much Debt Do I Need To File for Chapter 7 Bankruptcy?

If you’re having trouble paying your debts you may be a prime candidate to file bankruptcy. No matter what amount of debt you have if you can’t repay it and it’s causing problems, bankruptcy may be your best option. In fact, federal bankruptcy law doesn’t specify any minimum debt amount to file a Chapter 7 bankruptcy case. Since everyone’s financial circumstances are different, how do you decide if you should file?

Are You Eligible To File Chapter 7 Bankruptcy?

Although you don’t have to have a minimum amount of debt to file a Chapter 7 case, federal law still requires bankruptcy filers to meet certain eligibility requirements. 

First, you need to pass a means test to make sure you’re eligible for Chapter 7 bankruptcy. It focuses on your income rather than how much debt you have. If you make less than the income limits, you’re eligible to file a Chapter 7 bankruptcy case. If your income is higher than the median income for a household in your state, you’ll have to take the second part of the means test. This gets more complicated, but we’ve written a detailed article that walks you through it step by step.

You’re also required to complete two courses — a credit counseling course before you file a financial management course before the bankruptcy court grants your discharge. That’s the order that erases all your eligible debts. If you don’t pass the means test and can’t file a Chapter 7, you can file a Chapter 13 case. 

It’s also important to keep in mind that you can only file bankruptcy so often. If you’re thinking about filing today, you must not have filed a Chapter 7 bankruptcy within the last eight years. 

When To Consider Filing Chapter 13 Bankruptcy Instead

If your income is too high and you’re not eligible to file Chapter 7, a Chapter 13 bankruptcy case is still an option. People choose to file Chapter 13 bankruptcy cases for other reasons as well. For example, if you’ve been struggling to pay your mortgage debt and you’re facing foreclosure, you can use a Chapter 13 plan to pay your past-due mortgage payments and keep your home. Saving a car, home, or other property is a big reason people choose Chapter 13 over Chapter 7.

How Are Chapter 7 and Chapter 13 Different?

Each type of bankruptcy treats debts differently and looks a little different. Chapter 7 bankruptcy works well for individuals who have mostly unsecured debts like credit card bills and medical bills. So long as you qualify and complete all the requirements, your debts will be discharged relatively quickly, often in 4-6 months.

In Chapter 13 bankruptcy, your debts are reorganized and you make monthly payments to your creditors in a 3-5-year payment plan. This is why Chapter 13 takes much longer than Chapter 7, but it may be preferable for those with property or secured debts they want to keep. To qualify for a Chapter 13 bankruptcy, you must have enough disposable income to make payments for the length of your Chapter 13 plan.

Another big difference between Chapter 7 and Chapter 13 is that Chapter 7 doesn’t have a debt limit, but the Bankruptcy Code limits the amount of debt you can reorganize in a Chapter 13 case. These debt limits are updated every three years. They were last updated April 1, 2022 to $465,275 for unsecured debt and $1,395,975 for secured debt.

Are Your Debts Eligible for Discharge Under Chapter 7?

In bankruptcy, there are three categories of debt. For purposes of this article, the two relevant types are unsecured debts and secured debts. Secured debts are those that have some collateral backing them like a home or car. If you default on repaying the loan or debt, the creditor can take the collateral and sell it to cover the debt you owe. Secured debts are created with a lien. The two most common examples of secured debts are mortgage loans and car loans. 

Do You Have Unsecured Debts?

Most Chapter 7 filers’ debts are unsecured. These types of debts don’t have collateral to secure repayment. Examples include credit cards, personal loans, lines of credit, and deficiency balances that remain after a car repossession. Generally, a Chapter 7 bankruptcy discharge permanently eliminates all unsecured debts. This means if you have only or mostly unsecured debts, Chapter 7 bankruptcy can bring a lot of relief. 

Again, there’s no minimum or maximum amount of unsecured debt required to file Chapter 7 bankruptcy. In fact, your amount of debt doesn’t affect your eligibility at all. You can file as long as you pass the means test.

One thing that does matter is when you incurred your unsecured debt. Acquiring any debt just before filing your bankruptcy case, may raise red flags and cause your Chapter 7 bankruptcy trustee or a creditor to make accusations of bankruptcy fraud and object to the discharge of the debt.

Do You Have Secured Debts, Like a Car Loan or Home Mortage?

Bankruptcy doesn’t allow you to discharge secured debts like a car loan or home mortgage if you want to keep the collateral. This is the property that’s backing the debt. To keep the property, you have to continue paying the debt under the original contract terms during and after your bankruptcy case. If you have secured debts like a mortgage or car and file a Chapter 7 bankruptcy case, you must either redeem the property or reaffirm the loan agreement to keep the property.

If you’re behind on payments for a secured debt and file a Chapter 7 case, the creditor can ask the court to lift the automatic stay. After that, the creditor can foreclose on or repossess the property. In this case, it may be better to file a Chapter 13 bankruptcy, which gives you options to help you keep the property.    

Do You Have Any Debts That Can’t Be Erased in Bankruptcy? 

Not all debts can be discharged in bankruptcy. For example, tax debt, alimony, child support, and student loans are generally non-dischargeable debts under federal law. Also if you incurred debt incur debt in the 90 days or so before you file bankruptcy with the intent to discharge it in your bankruptcy, it won’t be eligible for discharge.

If you don’t have a lot of debt and are thinking it’s not enough to file, don’t rack up more debt just before you file your bankruptcy petition to rationalize filing bankruptcy. If you know that you’re going to file bankruptcy, don’t keep using your credit card until just a few weeks, or even months, before you file your case. Otherwise, you may well be accused of fraud if and when the creditor objects to the debt’s discharge.

Alternatives to Bankruptcy: Other Debt Relief Options

When you’re dealing with a mountain of debt, it’s easy to feel despair. The good news is that you have many debt relief options. It’s best to consider all your options before filing bankruptcy. Other debt relief options include a debt management plan, debt consolidation, and debt settlement. Many nonprofit credit counseling agencies offer free advice about these options. 

• In a debt management plan, you (or a credit counseling agency on your behalf) negotiate a workable payment plan with your creditors. It’s only useful for unsecured debts. 

• Debt consolidation involves combining multiple debts into one obligation. Many people with multiple student loans use debt consolidation to simplify their repayment process. But you can also consolidate other kinds of loans and even credit card debt.

• Debt settlement allows you to settle your debts for less than the full amount you owe by offering the creditor a lump-sum payment. Generally, debt settlement only works for unsecured debts like credit cards. 

To decide which option is best for you, you’ll want to consider how much debt you have, the type of debt, interest rates, and how long it will take to repay. Some debts simply won’t be possible to repay during your lifetime, but you can still focus on trying to get debt-free.

Is Filing Bankruptcy the Best Option for You?

Because every person’s financial situation is unique, only you can decide if filing bankruptcy is your best option. Consider your financial goals. Do you want to reorganize a car or mortgage loan or do you simply want to eliminate debt and get a fresh start?

There are positive and negative consequences of filing bankruptcy. For example, the automatic stay will allow you to regroup and get some relief from your creditors, but missing payments on your credit cards and loans will affect your credit report. Also when you file bankruptcy, your credit score will take a hit. But most bankruptcy filers rebuild their scores and are better off in the long run than those who don’t file.  

Also, filing bankruptcy can cost you money, especially if you opt to hire a lawyer. Upsolve offers a filing tool to help you file Chapter 7 bankruptcy for free.

Let’s Summarize…

Federal bankruptcy law doesn’t require you to have a minimum amount of debt to file bankruptcy. If you meet Chapter 7 eligibility requirements, you qualify to file bankruptcy. The decision to file depends on your individual circumstances. A free consultation with a credit counselor or bankruptcy attorney can help you decide on your best path forward.