How much debt is worth filing for bankruptcy?
How much debt is worth filing for bankruptcy? That's a question you have undoubtedly asked yourself if your debts are piling up and you're looking for a financial lifeline.
Chapter 7—liquidation bankruptcy—is one of several types of bankruptcy available in the U.S. to individuals, businesses, and other entities to eliminate unsecured debt.
Here's what you need to know to get some help from this legal debt relief tool.
How much debt do you need to file for Chapter 7 bankruptcy?
There is no minimum dollar amount you need to owe to file for Chapter 7 bankruptcy. Keep in mind, however, that bankruptcy negatively impacts credit scores for up to ten years. Only use it as a last resort (unless you don’t think you’ll ever need credit for anything at all … ).
Which debts are eliminated under Chapter 7 bankruptcy?
Chapter 7 bankruptcy can erase the following debts:
- Unpaid utilities
- Phone bills
- Credit card debts
- Medical bills
- Personal loans
- Student loans (if proven paying them causes undue hardship)
It CANNOT eradicate:
- Alimony or child support
- Taxes from the last three years
- Debts related to divorce proceedings
- Money owed to the government
- Court fines and penalties
- Debts from any personal injury caused to others
How Chapter 7 bankruptcy affects secured vs. unsecured Debt
Filing for Chapter 7 bankruptcy affects secure and unsecured debt differently. Unsecured debt is money owed that's not backed by a tangible asset. Credit cards, medical bills, and personal loans are unsecured debt.
Secured debt is backed by collateral—that is stuff you own and probably don’t want to lose.
Examples include:
- Mortgages
- Home equity secured by real estate property
- Small business loans secured by business assets
After filing a Chapter 7 Bankruptcy, you can keep a secured asset if you continue paying that loan. But if you are unable or unwilling to continue making loan repayments, the lender has the right to repossess the asset that secured the loan.
In Chapter 7 Bankruptcy, secured debt must be paid separately from unsecured debt, and secure assets may not be used to pay unsecured debt.
Only under exceptional circumstances may the court allow the debtor to give up a particular secured asset to pay off an unsecured debt—typically when the amount of the unsecured debt is greater than the value of the asset in question.
Is bankruptcy the right solution for you?
If your debts can be paid off through budget evaluation or debt consolidation within the next six months, then filing for Chapter 7 bankruptcy may not be the best outcome.
But if your unsecured debts exceed more than half of your annual income and despite budgeting efforts you have little to no disposable income, Chapter 7 bankruptcy can reset your finances and give you a fresh start.
Qualifying for Chapter 7 bankruptcy
To qualify for Chapter 7 bankruptcy you:
- You must pass a "means test" showing your income in the past six months is less than the median income for the same-sized household in your state.
- Prove you don't have enough income to repay creditors.
- Take an approved credit counseling course within 180 days before filing for Chapter 7 bankruptcy.
If you have filed for Chapter 7 bankruptcy in the past eight years or Chapter 13 bankruptcy in the past six years, you will not be eligible.
How Chapter 7 bankruptcy works
The process of filing for bankruptcy has several steps and takes about six months to complete.
- Attend credit counseling. You must receive credit counseling from an approved agency endorsed by the U.S. Trustee Program within 180 days of filing bankruptcy. If married, both you and your spouse are required to attend counseling.
- Hire an attorney. Hiring an experienced attorney will ensure filing goes smoothly and protect as many of your assets as possible during bankruptcy proceedings.
- File paperwork. Your attorney will file your court petition, stipulating your finances, creditors, assets, income, and expenses. This triggers an automatic stay, prohibiting creditors from collecting debt and taking money from your paycheck.
- Appointment of trustees. Once you have filed your petition, an unbiased trustee is appointed to manage your case. They are responsible for handling the sale of any assets that are not exempt, as well as making sure you are aware of the repercussions of declaring bankruptcy.
- Meeting of creditors. Your attorney will prepare you for the creditors' trustee meeting 21-40 days after the petition filing. While under oath, you will have to answer questions that confirm the legitimacy of your bankruptcy status.
- Complete counseling. Once the creditor meeting is over, you will have two months to finish a mandatory second counseling session to help you avoid future bankruptcy.
- Eligibility confirmation. If the means test indicates you are eligible, your case for Chapter 7 bankruptcy will proceed. If not, you may have the option to file for Chapter 13 bankruptcy protection instead.
- Property liquidation. The trustee evaluates nonexempt assets to determine if they should be sold to generate proceeds for creditors. Examples include jewelry, equity in a house, or a car equal to debt owed.
- Secured debts. You may be able to settle your secured debts by paying the creditor the current value of the asset used as collateral, or by agreeing to continue making payments and excluding that debt from bankruptcy.
- Discharge. Once the trustee has sold any assets and paid out the claims of creditors, all eligible debts are then discharged, and the creditors are no longer allowed to collect any money from you.Generally speaking, the court will issue the order of discharge within sixty to seventy-five days of the meeting of the creditors.
Life after filing Chapter 7 bankruptcy
Filing for Chapter 7 bankruptcy is an important decision and should only be made after you’ve carefully assessed all aspects.
It's not so much about how much debt you have to have to file for bankruptcy, but rather your overall debt management plan.
If bankruptcy is something you're contemplating, speak with an attorney to make sure it's the best way to start fresh financially.
Although filing for bankruptcy can bring you substantial relief and eliminate the stress of mounting debt, remember that after filing for bankruptcy it will take time and patience to reconstruct your finances and rebuild your credit from the ground up.