The burden of debt is unbearably heavy, and if it makes you feel any better, you share this burden with trillions of Americans.
In fact, according to Fool, In 2021, 288,000 Americans filed for chapter 7 Bankruptcy which makes up for 70% of all personal bankruptcies filed in that year.
So you are not alone in this battle.
So if you are wondering when is the right time and how much debt you need to have to file for Chapter 7 Bankruptcy? Then keep reading this article till the end.
- You need to have no chapter 7 bankruptcy filing in the last eight years, and you need to pass a means test to be eligible for chapter 7 bankruptcy.
- You will also have to fininsh two courses along with the means test to be eligible.
- You can apply for Chapter 7 bankruptcy if your income is less than the income restrictions of the law.
- When you file a chapter 7 bankruptcy, all of your unsecured debts get discharged permanently.
What is Chapter 7 Bankruptcy?
Bankruptcy is a severe matter that you have to understand extremely well to the very depths of it because of its important consequences once it happens.
The process to liquidate your assets goes by Chapter 7 of Title 11 of The United States of America Bankruptcy Code.
The government appoints a trustee to sell the nonexempt assets you own in order to pay the debts you have to creditors; once these funds are over, the remaining debt gets discharged since you can’t pay them.
However, there are a few things you need to follow to be eligible for chapter 7 bankruptcy, like having no chapter 7 bankruptcy filing in the last eight years, and you need to pass a means test.
This is sometimes also known as “straight” or “liquidation” bankruptcy.
Eligibility for Chapter 7
How Much Debt You Need to Have to File for Chapter 7 Bankruptcy?
Even though there is no minimum limit for the amount of debt1, you must have to file a Chapter 7 bankruptcy, federal law requires bankruptcy filers to fulfill certain qualifying standards.
To be qualified for Chapter 7 bankruptcy, you must first pass a means test. This test is generally about your revenue rather than your debt.
You can apply for Chapter 7 bankruptcy if your income is less than the income restrictions of the law.
If your income is above the average household income in the state you are living in; you must complete the second portion of the means test.
You must also finish two courses, in addition to the means test.
A credit counseling course before the filing for chapter 7 bankruptcy and a course for your management of finances before the bankruptcy court issues your discharge.
Read: Difference Between Debt Settlement And Debt Consolidation
The majority of Chapter 7 bankruptcy filers’ debts are unsecured debts.
These debts have no collateral to make sure the debtor will somehow make the payment like a credit card bill.
When you file a chapter 7 bankruptcy, generally, all of your unsecured debts get discharged permanently. This includes:
- Credit card debt
- Personal loans
- Medical bills
- Car loans
This implies that if you solely have unsecured debts, Chapter 7 bankruptcy might provide significant relief. 2
Property Exemptions For Chapter 7 Bankruptcy
Property exemptions for Chapter 7 Bankruptcy include:
- Necessary clothing.
- Necessary furnishings and goods.
- Necessary vehicles (up to a certain value).
- Jewelry (up to a certain value).
- A portion of earned wages.
- Household appliances.
- Public benefits, such as unemployment compensation, Social Security, public assistance, etc
- Tools of the debtor’s trade.
- A part of the equity in the debtor’s home.
- Damages are given for Personal injury. 3
What Are The Benefits of Chapter 7 Bankruptcy?
People feel afraid to file for bankruptcy for fear of losing their personal property.
However, filing for Chapter 7 bankruptcy can discharge your loan instead of just decreasing your debt load.
Here are some more benefits of filing for Chapter 7 bankruptcy:
- A majority of people who go for chapter 7 bankruptcy are able to keep their property and other assets, such as a car.
- After filing for bankruptcy petition collections, calls are stopped to a great extent.
- Chapter 7 Bankruptcy does not have nonexempt assets. So you will not have to commit to making debt repayment still, and all of your qualifying debts will be discharged.
- By filing for this, you can get a fresh financial start and have peace of mind.
What Is The Filing Process for Chapter 7 Bankruptcy?
Once you decide to opt for this option, your lawyer will explain the filing process to you.
You will first file for a bankruptcy petition, and as soon as your creditors are informed about the same, you will stop getting collection calls.
Additionally, you will be required to provide documents and additional paperwork such as:
- List of your debts, due amount, and creditors.
- List of your assets.
- Your income statement.
- Copies of filings and your tax records.
- Proof of recent and approved credit counseling.
After submitting these documents, your case will be filed, and your creditors will be notified.
After this, a case trustee will meet your attorney and yourself to assess your current financial situation. 4
When To File For Chapter 7 Bankruptcy?
You might want to consider the following question before deciding whether you should file for chapter 7 bankruptcy or not:
- Is it possible for you to pay back the amount you owe? A lot of people are able to pay back $10,000 or less. But if you don’t think you will be able to repay your debt in any way, then Bankruptcy can help to fix your finances and to rehabilitate your credit quickly.
- Is negotiation with creditors possible? If you can negotiate with your creditors for a debt settlement or come up with an alternative paying plan, then you do not need to file for Chapter 7 Bankruptcy. However, forgiven income over $600 is taxable, whereas discharged debt in bankruptcy is not taxable.
- Are you willing to work with a credit counseling agency? This approach allows you to pay off your accounts in up to five years and let you pay less interest. However, once you have settled your debt, you will need to start building your credit again. By choosing bankruptcy, you can achieve the same goal in less time. 5
When To File For Chapter 13 Bankruptcy Instead?
If your income is too high to file for chapter 7 bankruptcy, then you can file for chapter 13 bankruptcy instead.
People may file for chapter 13 bankruptcy for some other reason as well.
For example: if you are unable to pay your debts and are facing foreclosure, then you can opt for a Chapter 13 plan, make your past-due payments and save your house.
If a person wants to save his assets, such as a car, home, or any other big property, then they might choose chapter 13, Bankruptcy, over Chapter 7.
Chapter 7 Vs. Chapter 13 Bankruptcy
Both Chapters 7 and 13 of bankruptcy are different and treat debts differently.
Under chapter 7, the debts are released quickly in 4-6 months and are suitable for people who have unsecured debts such as medical debt, credit card debt, etc.
Chapter 13 bankruptcy, on the other, reorganizes your debt in a 3-5 year repayment plan and requires you to make monthly payments to your creditor. This is the reason why chapter 13 takes more time.
This option is suitable for people who have secured loans and want to save their property from getting seized.
And to be eligible for chapter 13, you need to have sufficient disposable income to keep making monthly payments to your creditors.
Another significant difference between the two is that there is a limit to how much debt you can reorganize in chapter 13, while chapter 7 does not have any limits.
The debt limit is updated every three years, and the last time it was updated was on April 1, 2022, to $1,395,975 for secured debt and $465,275 for unsecured debt. 6
To sum everything up, there is no amount of minimum debt that you must have to file for a chapter 7 bankruptcy.
However, there are other requirements that you need to fulfill in order to be eligible for a chapter 7 bankruptcy.
One of the most important requirements is not to have a chapter 7 bankruptcy file in the past eight years.
In addition to all this, not all debts are applicable for a chapter 7 bankruptcy.
The majority of debts that you can have a discharge for are unsecured debts like credit card bills, but debts like mortgages or car loan that has some sort of security for repayment do not have a discharge under chapter 7 bankruptcy.
The same rules apply for unsecured debts; there is no minimum or maximum amount of debt for filing for chapter 7 bankruptcy as long as you can fulfill other requirements.
How far in debt do I need to be before I file for bankruptcy?
There is no minimum amount of debt that you need to have to file for bankruptcy.
You can choose to do so when it is practically impossible for you to pay your debts, and there is no better option left.
When can chapter 7 be denied?
It can be denied for a number of reasons as described under section 727(a), such as failure to provide the relevant documents or information, not completing a course on personal financial management, concealment or transfer of property with intent to defraud, hindering or scam creditors, etc.
What is better chapter 7 or 13?
You may want to opt for chapter 13 bankcruptcy if you want to save your property or mortgage.
Amit Gupta is the founder of National Planning Cycles, a company that helps startups, individuals, and small businesses with their financial planning. He has a vast amount of experience in the finance sector, having managed Google Play accounts for some of the world’s most successful unicorns. Amit is an expert in his field, and he uses his knowledge to help others achieve their individual goals.
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