Are you deeply in debt and starting to feel like there’s no way out?
You may have heard about filing for Chapter 7 bankruptcy as a potential solution.
After reviewing many bankruptcy documents over the years, we’ll share with you how much do you have to be in debt to file Chapter 7 bankruptcy and the steps you should take before exploring this option.
We’ll also discuss some alternatives that can help improve your credit score without filing for bankruptcy.
- No minimum amount of debt is required to qualify for Chapter 7 bankruptcy
- If the amount of debt you owe is greater than the value of the assets you own, you may be able to file for Chapter 7 bankruptcy and have some or all of your unsecured debts forgiven
- Your family income must be below the state median income measured using a “means test”
- Secured debts will not be discharged, but your personal property can be exempted from Chapter 7 bankruptcy
- With Chapter 13, you can retain possession of all your assets while making payments towards your unsecured debts for 3-5 years.
How Much Debt Is Enough To File Bankruptcy?
There is no set amount of debt that you must owe to qualify for Chapter 7 bankruptcy.
Whether or not your debts are greater than the value of your assets is another factor that can determine if your debts can be forgiven.
However, it would be best if you only considered bankruptcy as a last resort.
Once you file for bankruptcy, it will stay on your credit report for up to 10 years, meaning lenders can penalize you in their decision-making for future credit approvals.
The same applies to Chapter 13 bankruptcy except that there is a maximum threshold of $419,275 for unsecured debt and $1,257,850 for secured debt, but you are allowed to keep your assets while you pay back your debt on a 3-5 years payment plan.
Will Filing for Bankruptcy Help Eliminate Your Debts?
The goal of bankruptcy is to help you eliminate or reduce your debts to rebuild your financial well-being.
For Chapter 7 Bankruptcy, some or all of your unsecured debts can be forgiven and wiped away if your debts exceed your assets, as mentioned above.
For Chapter 13 Bankruptcy, a bankruptcy trustee will create a debt repayment plan with your creditors to pay off the debt over 3-5 years.
What Type of Debt Is Forgiven In Bankruptcy?
The type of unsecured debts that can be forgiven in Chapter 7 Bankruptcy are:
- Credit card debt
- Medical bills
- Personal loans
- Payday loans
Chapter 13 Bankruptcy does not have any debts that can be forgiven.
Which Debts Can’t Be Discharged In Chapter 7 Bankruptcy?
There are some exceptions below to dischargeable debt for Chapter 7 Bankruptcy:
- Tax debts owed to the government
- Child support payments
- Alimony or spousal support payments
- Most student loan debt
- Criminal fines and court judgments
- Debts from fraud or misrepresentation
- Car loan debt
As mentioned at the beginning of this post, it’s important to remember that even during financial hardship, filing for bankruptcy should only be used as a last resort after considering all your other debt repayment options.
Who Is Eligible To File Chapter 7 Bankruptcy?
To be eligible to file for Chapter 7 Bankruptcy, you must pass the “means test.”
A “means test” shows each state’s median income and your income must be below the median family income to be eligible for Chapter 7 bankruptcy.
You must also meet the criteria that your unsecured debts exceed your assets.
There are some cases where you can still qualify even if your income is above the median level, and this depends on the amount of your debts and assets.
As you can see, bankruptcy laws apply to all states and can be complex, so follow the court’s proper bankruptcy filing process.
The Benefits of Chapter 7 Bankruptcy
Filing for Chapter 7 bankruptcy can be beneficial if you are in debt and cannot pay the minimum debt requirement.
Some of the benefits include:
- Reduce all your debts down to those that cannot be discharged in bankruptcy (mentioned above)
- Creditors will no longer be able to pursue collection actions against you after your debts have been discharged
- You also may qualify for some exemptions on certain assets or property to be excluded in the bankruptcy (i.e., personal property)
- Filing for bankruptcy can help restore your credit score more quickly than other debt-relief options
Factors That Will Help You Decide When To File Bankruptcy
There are several factors to consider before deciding on Chapter 7 Bankruptcy.
You should assess how much of your unsecured debt can be discharged in bankruptcy and whether the amount is substantial enough for filing bankruptcy.
Your lifestyle will be the biggest change after bankruptcy as you work your way back to get your finances on track.
It’s important to ensure these changes are realistic and achievable so you don’t fall behind in debt payments again.
With careful consideration and planning, Chapter 7 Bankruptcy can be an effective way to get out of debt and become debt free.
Get Prepared to File Chapter 7 Bankruptcy
First, you’ll need to start gathering all the necessary documents, such as:
- All debt and asset documents
- Income statement showing your income and expenses
- Tax documents
Additionally, you’ll want to consult with an attorney who is an expert in this process to understand your rights under the law.
Your Lawyer can also help explain the potential risks of filing bankruptcy and advise whether it suits your situation.
Steps To Chapter 7 Bankruptcy
Once you have consulted your Lawyer and submitted all the necessary documents, you’ll expect to proceed with the following:
- Attend the hearing at your local courthouse, where the bankruptcy judge will review your finances and assess if bankruptcy is the best option for you
- After the hearing, you may be required to take additional steps, such as attending credit counseling or preparing a repayment plan
- Most of your unsecured debts will be discharged, but the remaining debts, including all secured debts, are to be paid via a repayment plan
You’ll need to manage these debts properly to stay on track with the repayment plan.
Key Considerations To Chapter 7 Bankruptcy
When Can You Consider Chapter 13 Bankruptcy Instead
If you have a steady income and your total debt is below the median debt for your state, then filing for Chapter 13 may be a better option than Chapter 7.
Chapter 13 can help you keep all your assets while allowing you to make payments on all your unsecured debts over 3-5 years.
This repayment plan could give you more time to recover financially.
Alternatives to Bankruptcy: Other Debt Relief Options
If you are not sure whether bankruptcy is the best option for you, there are other debt-relief options available you can consider:
- Debt consolidation is the process of creating a debt management plan by combining all your debts into one lump sum payment with a lower interest rate
- Credit counseling agencies provide credit counseling on sound financial advice, such as budgeting and managing your debt, while also helping you consolidate your debt into a debt settlement program
- Debt settlement companies help you lower your debt from creditors with the promise of paying the settled amount in full
These alternatives can help you get out of debt without filing for bankruptcy and can be less damaging to your credit score in the long run.
Understanding these options is important before deciding which route to take with your finances.
Wrapping Up And My Experience With Chapter 7 Bankruptcy
While working in the bank, we approved most applications with previous bankruptcy history, but double bankruptcy was one factor the bank did not consider.
Although Chapter 7 Bankruptcy is a financial management tool designed by Congress to provide you with debt relief with no minimum amount of debt requirement, it’s important to consider this option as a last resort.
If you think filing for Chapter 7 Bankruptcy is the right step for you, consult an experienced bankruptcy attorney to go over the “mean test” in your state and review your debts and assets.
The goal of Chapter 7 bankruptcy is to help you turn your way back from financial distress so that you can turn your finances around.
Frequently Asked Questions
How Much Do You Have To Be In Debt To File Chapter 7 Bankruptcy?
No minimum amount is required for Chapter 7 Bankruptcy, but ensure you pass your state’s “mean test” and your total debt is higher than your assets.
How Long Does It Take To Discharge From Chapter 7 Bankruptcy?
Bankruptcy discharge takes a minimum of 3-6 months after you have completed all your bankruptcy requirements.
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