If you have so much debt that you’re considering filing a Chapter 7 bankruptcy, you have enough debt to qualify. The U.S. bankruptcy code doesn’t specify a minimum dollar amount someone must owe to make them eligible for a qualified filing.
In short, any debt is enough debt.
More important than the size of your debt is the size of your income. How much money you earn affects whether you qualify for Chapter 7.
Determining Eligibility for Chapter 7 Bankruptcy
Although there is no minimum amount of debt that makes someone eligible for a Chapter 7 bankruptcy, there are other criteria that come into play. You can file for Chapter 7 only after you meet this short list of qualifications:
- You want to file as an individual or as a couple.
- You do not want to file as a business or a corporation.
- You had no debts wiped away by bankruptcy within the previous 6-8 years.
- You have gone through court-approved credit counseling within the past six months.
- You pass the Chapter 7 means test.
All these qualifications are important, but the means test is a key determining factor.
Chapter 7 Means Test
The Chapter 7 means test has two steps to it — measuring your income against your state’s median income amount and evaluating your disposable income to see whether you can afford to pay your bills.
Specifically, the test looks at your past six months of income. The more money you make, the less likely a bankruptcy will move forward because you’re likely to be judged able to pay back the money you owe.
Your income must fall below the median household income amount in the state where you live. Each state’s amount is different. In the most recent data compiled by the U.S. Census Bureau, the median amount in Texas is $64,024. In Mississippi, the number is $45,792 and in California, the median number is $80,440.
If your income falls below your state’s median income amount, you must also not have too much disposable income. You calculate disposable income by taking your total income and subtracting monthly costs for your mortgage or rent, food, medical bills, and clothes. You make these calculations and affirm your answers by filling out two documents: Form 122A-1 and Form 122A-2.
The first piece of means testing paperwork is Form 122A-1, which establishes your income level. It’s a simple, three-page form. On it, you must list your marital status, your gross income (and that of your spouse, if applicable), plus any money you get for alimony or child support, any unemployment income and any money from Social Security, pension payments and other retirement investments (such as a 401(k), an IRA or an annuity).
You also must look up the median income for your state and then calculate whether your income level is higher or lower than the median in your state.
No matter the result, you can still move on to Form 122A-2.
Form 122A-2 is the heart of the means test. It is a more detailed, nine-page form that calculates your disposable income — money that should be available for debt payments.
On the form, you will write in your income and then make more deductions for housing and utilities, out-of-pocket healthcare payments and payments for food, clothing, and other items. The number of people in your household also gets listed, as do any special circumstances in your life that “justify additional expenses or adjustments of current monthly income.”
You sign and date both forms before turning them in with your Chapter 7 filing.
Benefits of Chapter 7
The appeal of Chapter 7 is that it allows you to eliminate your unsecured debt — not just slow the payment terms or shrink the amount you owe, no matter how much you owe.
Benefits of filing Chapter 7 include:
- You don’t have to agree to a repayment plan
- All of your qualifying debt obligations go away
- Debt collection ends
Under the right circumstances, you get to keep many of your assets, such as your house and your vehicle. Once the bankruptcy goes through, debt collection is over, which means debt collector harassment ends. No more phone calls, letters and emails from companies or debt collectors that want you to pay them back.
A Chapter 7 bankruptcy doesn’t include filing a repayment plan of any of your debts. It means that a bankruptcy trustee will sell your non-exempt assets, taking the proceeds from the sales to pay your creditors. Also, some of your property could be subject to liens that pledge it to creditors.
The U.S. Bankruptcy Code permits some of your assets to be exempt from liquidation.
The kinds of debt that Chapter 7 bankruptcy covers are called dischargeable debt. They include:
- Credit card debt
- Medical debt
- Car loans
- Personal loans
- Payday loans
- Utility bills
- Judgements from debt collection agencies
- Judgements on credit card debt
- Any other unsecured debts
» Learn More: Pros and Cons of Chapter 7 Bankruptcy
Which Debts Can’t Be Discharged in Chapter 7 Bankruptcy?
Even if successful, Chapter 7 bankruptcy can’t erase all your debts. That’s because there are categories of debt that the courts have decided must get paid, regardless.
Debts that Chapter 7 can’t get rid of are called non-dischargeable debts. They include:
As you total your monthly financial obligations, calculate how much money fits into these five categories. That’s important, because it’s rare that you can negotiate your scheduled payments in these areas to a lower amount. Tax debts are perhaps the easiest of the group to gain new terms for, followed by some student loans.
If your monthly obligations in the non-dischargeable category represent the primary reason you’re considering filing for a Chapter 7, it may be time to look at alternatives to bankruptcy.
Alternatives to Chapter 7 Bankruptcy
Any bankruptcy, including Chapter 7, is a serious financial decision with long-lasting consequences. It becomes part of your personal financial history for the next few years and will affect your life when you want credit to make a major purchase. Bankruptcy isn’t the best solution for everyone, and you should consider it your last resort to solving a major financial problem.
Some downsides of Chapter 7 are:
- The bankruptcy sticks to your credit report for up to 10 years.
- You could lose most of your personal property.
- Your secured debts don’t get included in the filing, and you will have to repay them.
- You can’t file for another bankruptcy for at least eight years.
You almost always have alternatives to filing for Chapter 7 bankruptcy. Among them are:
- A debt management plan: Only offered by nonprofit credit counseling agencies, debt management combines all your debts, reduces the interest rate you pay on credit card debt to approximately 8%, but does not involve a loan.
- Debt consolidation: A typical way of managing personal finance troubles, consolidating your debts involves combining all debts into a single loan that’s easier to manage.
- Debt settlement: In a debt settlement option, typically a third-party negotiates your obligations down one debt at a time, and you end up paying less than what you owe. This sounds enticing, but beware. There are many negatives involved.
- Debt snowball: A debt snowball method is a strategy in which you pay off your smallest debts first.
- Debt avalanche: In a debt avalanche strategy, you prioritize your debt payoffs according to interest rate, saving you money. The debt with the highest interest rate charge gets paid off first, followed by the one that is next-highest and so on.
- Chapter 13 bankruptcy: This is the only other bankruptcy alternative to Chapter 7.
Before proceeding with a Chapter 7 filing, consider whether a debt management program makes more sense for you. In a debt management program, you can significantly lower the interest rates on your debts, make lower monthly payments that fit your budget, and rebuild your credit and pay off your obligations. In the end, you have a much better financial profile, one without a bankruptcy.
» Learn More: Bankruptcy vs. Debt Settlement
» Learn More: Bankruptcy vs. Debt Consolidation
Chapter 13 Bankruptcy
Like Chapter 7, Chapter 13 is one of two types of personal bankruptcies.
If you fail the Chapter 7 means test and want to proceed with a bankruptcy filing, Chapter 13 is your only option. Also known as a wage earner’s plan, Chapter 13 bankruptcy enables people to shuffle their debt obligations as they work to repay them, usually over a 3-5 year period.
The three major advantages of a Chapter 13 filing are:
- You can save your house from foreclosure
- You can extend your debts across the life of the Chapter 13 plan
- You only have to make one debt-related payment a month to a trustee, who then pays your creditors
Within 14 days of filing for Chapter 13, you must submit a payment plan to the court. Within 30 days of filing, you must start making your new payments, even if the court has yet to approve the plan. Within 45 days after meeting with your creditors, the bankruptcy judge must hold a confirmation hearing about your plan.
Once the court approves your plan, you can make payments directly, or through a payroll deduction, to the trustee.
Find Out If Chapter 7 Bankruptcy Is Right for You
If you decide to file for a Chapter 7 bankruptcy, you must go through credit counseling before your bankruptcy concludes. This pre-bankruptcy credit counseling is a strict regulation of the bankruptcy laws.
Qualified representatives from nonprofit credit counseling agencies can walk you through all the financial options that are open to you and will help you identify the best ones for your situation. Counselors at InCharge Debt Solutions are well-versed in all the alternatives to bankruptcy and can help you gain back your credit while not surrendering all of your assets.
Once your bankruptcy is final, you’ll receive a discharge of debt from the court. This is the official notification that frees you from any financial liability for the debts that were part of your bankruptcy. (You and your attorney should know what is on that list ahead of the discharge. That list may or may not include specific tax obligations.)
About The Author
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
- N.A. (2022, January 7) Frequently Asked Questions (FAQs) – Credit Counseling. Retrieved from https://www.justice.gov/ust/frequently-asked-questions-faqs-credit-counseling
- N.A. (2021, October 8) 2019 Median Household Income in the United States. Retrieved from https://www.census.gov/library/visualizations/interactive/2019-median-household-income.html
- N.A. (ND) Chapter 7 Bankruptcy Basics. Retrieved from https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics
- N.A. (ND) Chapter 7 Bankruptcy – Liquidation Under the Bankruptcy Code. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/chapter-7-bankruptcy-liquidation-under-the-bankruptcy-code
- N.A. (ND) Chapter 7 State of Your Monthly Income. Retrieved from https://www.uscourts.gov/sites/default/files/form_b122a-1.pdf
- N.A. (ND) Chapter 7 Means Test Calculation. Retrieved from https://www.uscourts.gov/sites/default/files/form_b122a-2.pdf