If you're treading water in a sea of debts you can no longer manage, bankruptcy may be the solution. If you qualify to file bankruptcy under Chapter 7, the bankruptcy trustee will seize and liquidate your assets -- paying off as many of your creditors as possible. The court discharges any remaining unpaid debts. Chapter 7 bankruptcy comes with certain financial restrictions, however, and isn't an option for everyone.
No minimum amount of debt is required to file bankruptcy under Chapter 7. The reverse is also true: there is no ceiling to the amount of debt you can have discharged in a Chapter 7 bankruptcy. You cannot, however, pick and choose which debts you want discharged. You must include all of your creditors and the amounts you owe when you file your initial petition. If you fail to do so the court has the right to dismiss your bankruptcy case.
Although there is no limit to the amount of debt you can discharge during a Chapter 7 bankruptcy, there are limits to the amount of income you can earn to be eligible to file Chapter 7. When you file, you must submit detailed information about your debts and income. The court compares your income to the median income in your state. If your income is less than your state's median income, you qualify automatically. If your income exceeds the median income in your state, you may apply a variety of standard deductions, such as deductions for food, housing and utilities, to reduce your overall income. If these deductions do not lower your income to the state median, you cannot file Chapter 7 bankruptcy.
The bankruptcy court has the authority to discharge debts regardless of the amount. Certain restrictions may apply, however, for debts you incurred immediately prior to filing for bankruptcy. Creditors have the right to challenge any credit purchases you made in the 90 days prior to filing your case that exceed $500. If these purchases were not for goods the court deems “reasonably necessary,” such as food or clothing, the court may not discharge the debt. The same is true of any cash advances of $750 or higher that you obtain using a credit card in the 70 days prior to filing bankruptcy.
Chapter 13 Bankruptcy
If you don't qualify for Chapter 7 or want to keep your major assets, such as your home or automobile, you can file Chapter 13 bankruptcy. Chapter 13 bankruptcy differs from Chapter 7 in that it has no income limitations. Under Chapter 13, you must pay back as much of your debt as possible over a 3-to-5 year period.
Unlike Chapter 7 bankruptcy, Chapter 13 carries debt limitations. If you owe more than $360,475 in unsecured debt or more than $1,081,400 in secured debt, you will not be eligible for a bankruptcy discharge under Chapter 13. These discharge limitations change periodically. Speak with a licensed bankruptcy attorney if you have concerns about whether or not you qualify for either Chapter 7 or Chapter 13 bankruptcy.
- United States Courts: Chapter 7 – Liquidation Under the Bankruptcy Code
- Boyle, Bain, Reback & Slayton: Chapter 7 FAQ
- Mark A. Wortman Attorney at Law, LC: Chapter 7 Means Test
- Andres Montejo, Esq.: Debts for Recent “Luxury Goods or Services” and Cash Advances
- United States Courts: Chapter 13 – Individual Debt Adjustment
- Bankruptcy Law Network: Chapter 13 Debt Limits Increase By 7%
Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.