George Simons | December 01, 2022
Summary: Are you sure that you'll never be able to repay your debts? Just looking for a fresh start? Chapter 7 bankruptcy might be your way out. Find out if you can file for Chapter 7. And learn the pros and cons of that decision.
When you think of the word “bankruptcy” you may think, “Ouch!” Or, you may think, “Yay!”
Both are valid.
If you're having to consider bankruptcy right now, chances are your financial struggles are causing you a lot of grief: mental, emotional, social, or even physical.
Depending on your situation, Chapter 7 bankruptcy may be exactly the relief you need. It has the power to erase certain debts and give you a fresh start.
But how much do you have to be in debt to file Chapter 7? Read on to find the answer, along with productive ways to rethink the question.
There's actually no minimum amount of debt you need to be in before you can file for Chapter 7 bankruptcy.
Instead of thinking about how much money you literally owe, focus on how much you can afford to pay.
In a nutshell: If you're rich, or you have nice things that could be sold, you probably don't qualify for Chapter 7 bankruptcy. (But you might qualify for Chapter 13 bankruptcy.)
You have to pass what's called a “means test.” If your income is less than your state's median income, then you pass, and you can file.
The U.S. added income limits to Chapter 7 bankruptcy eligibility in 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Because Chapter 7 bankruptcy was made for people who legitimately can't pay their debts, Congress wanted to discourage high-income earners from abusing the bankruptcy process.
The test will make a calculation using your income from the last six months. It'll take the total and divide it by six to get your average monthly income. Multiply that by 12, and you get your annual income, which can be compared to the state median income.
Don't let the form intimidate you. There are a lot of questions, but they're pretty straightforward. Answer each question honestly, and you should be fine.
There are some exceptions to the income limit.
If more than 50% of your debt is business debt rather than personal debt, you might not have to pass the means test. Here's an example of business debt: If you rack up debt on the credit card that you use specifically for your business or LLC, that's business debt. So if you're in debt primarily because your business has been struggling, the income limit may not apply to you.
Another exception may apply if you're a disabled military veteran. The HAVEN Act of 2018 protects military disability benefits from the income limit.
If you fall under either one of these categories, make sure you fill out the right forms when you file so the court can know right away to calculate your eligibility differently.
If you're still wondering, “How much do you have to be in debt to file Chapter 7?”, here are some questions you can ask yourself to get a better idea:
If you answered yes to these questions, Chapter 7 may be your answer.
Remember that the means test looks back six months. Even if your income in January, for example, was much higher than your income in June, the test will use an average.
Say you recently lost your job. That drastic change in income won't be reflected in your calculated annual income. If you wait a few months, the results of your means test may be very different.
You should also wait if you think you'll have more debt soon.
This is because you can only file every eight years. You can't file Chapter 7 bankruptcy every time you get in a tight spot.
Income isn't the only thing that determines eligibility. If Chapter 7 bankruptcy won't cover your specific kind of debt, there's no point in filing.
You can probably guess the kinds of debts that are covered by bankruptcy. Here are some examples:
These are called “dischargeable” debts,” and they'll be wiped clean when you file for bankruptcy.
Debts that can't be eliminated are called “non-dischargeable” debts. Here are a few common ones:
There's also what's called “secured” debt. If you have a mortgage or a car loan, bankruptcy won't cover the amount you still have you pay — unless you give up the property.
But that doesn't mean you have to give it up. If you want to keep the property and still file for bankruptcy, your request may go through if you can prove you are on top of those payments.
So, how much do you have to be in debt to file Chapter 7? Now that you have a better idea of your situation, you can answer this question with a more solid number.
But every unique combination of income and debt is going to need bankruptcy at a different point, so your answer is not a dollar amount. Instead, you're looking for a debt-to-income ratio.
You start with a pretty simple formula:
(monthly expenses) ÷ (monthly income) = your debt to income ratio
Next, move the decimal point two spaces to the right to get a percentage.
If you get 30% or more, that means it's very difficult for you to pay your debts with your current income. In other words, you can't afford to pay your debts. At this point, bankruptcy becomes a reasonable option.
Bankruptcy will prevent a lawsuit from happening. But what if you already have a lawsuit against you?
Filing for bankruptcy after a judgment is very different from filing without a judgment. So, you'll want to respond to the lawsuit quickly and well to avoid a judgment.
A judgment gives a debt collector or creditor power to collect the money you owe, typically in harsh ways. For example, wage garnishment will require your employer to take out a certain amount of your paycheck each week to put toward the debt. Creditors can also get a lien on your property, meaning they basically own it instead of you until your debt is paid.
Bankruptcy will erase your debt, but it won't erase the lien. It also won't erase some judgments that are non-dischargeable.
SoloSuit makes it easy to respond to a debt collection lawsuit.
How it works: SoloSuit is a step-by-step web-app that asks you all the necessary questions to complete your answer. Upon completion, you can either print the completed forms and mail in the hard copies to the courts or you can pay SoloSuit to file it for you and to have an attorney review the document.
"First time getting sued by a debt collector and I was searching all over YouTube and ran across SoloSuit, so I decided to buy their services with their attorney reviewed documentation which cost extra but it was well worth it! SoloSuit sent the documentation to the parties and to the court which saved me time from having to go to court and in a few weeks the case got dismissed!" – James
Here's a list of guides for other states.
Being sued by a different debt collector? We're making guides on how to beat each one.
Is your credit card company suing you? Learn how you can beat each one.
Need more info on statutes of limitations? Read our 50-state guide.
Need help managing your finances? Check out these resources.