There is no minimum threshold amount of debt to be able to file for bankruptcy. My personal recommendation is that it’s probably not worth it for a debt amount under $5,000. If you have debt over $5,000, your minimum monthly payments are causing you a hardship, and you have been paying high interest and minimum payments with little, or no progress in reducing the principal amount of the debt you are a potentially good bankruptcy candidate.
There is no maximum amount of debt to file a Chapter 7, so that amount can be unlimited. If you have hundreds of thousands of dollars in debt, be assured that the trustee will ask how that money was spent. Some people have over hundred thousand dollars just in student loan debt alone. Even though there is no debt limit to file a Chapter 7, there are income requirements which should be addressed during your consultation. Our first analysis is whether you will qualify for a Chapter 7.
There are caps on debt in a Chapter 13 case which might seem illogical because you are actually paying your creditors, through the trustee for 36-60 months and in a Chapter 7 you are not making a monthly payment to the trustee. For a Chapter 13 you are permitted to have $465,275 in unsecured debt. Unsecured debt includes credit cards, personal loans, medical debt, and student loan debt.
You are allowed to have up to $1,395,875 in secured debt which would include items such as a home mortgage or financed vehicle.
There are certain income qualifications for a Chapter 7 bankruptcy. Social security income, including social security disability does not count as income on the means test (the test on the bankruptcy petition that determines which chapter of bankruptcy you qualify for). Similarly, veteran disability benefits do not count as income. For example, if you are receiving social security or veteran disability benefits you could make an unlimited amount per month and still qualify for a Chapter 7 bankruptcy.
Some people are surprised that pensions for government work such as teachers, police officers, military, or firemen still count as income. Workers’ compensation benefits also count as income. Short-term or long-term disability from a private company that is not social security are considered income. Regular wages or income from self-employment are considered income. Child support and alimony are considered income on the means test. Even if the income is not taxable, it could still qualify as income on the means test.
The issue of whether money in your account at the time of filing is exempt is a totally different issue than whether it counts as income on the means test. For example, workers compensation, child support and alimony are generally exempt even though they are considered as income on the means test Any money you have in your bank account from one of these sources in addition to social security or veteran disability benefits would be protected from the trustee.
We can exempt up to 75% of wages in your bank account. However, self-employment income is not exempt. It is important to have an attorney help you evaluate your candidacy for a Chapter 7 bankruptcy and to ensure you maximize your property exemptions.
Let’s discuss in this article two types of bankruptcy filings, some of the bankruptcy eligibility requirements, major benefits to filing for bankruptcy and why this author finds it preferred in certain cases to file for bankruptcy Chapter 7 or Chapter 13 compared to a debt consolidation situation.
If you are eligible to file for a Chapter 7 bankruptcy that is always preferred to debt consolidation since it allows you to completely discharge all of your unsecured debt without having to repay it. It allows you to wipe the slate clean and restart your credit and life debt-free again.
There are certain income requirements to qualify for the Chapter 7 which is dependent on your household size. For a household size of 1 its $53,152, for a household size of 2 its $66,748, for a household size of 3 its $71,689, for a household size of 4 its $85,203. Those threshold amounts usually increase twice annually.
If you are only eligible to file a Chapter 13, you would be in a payment plan to the trustee. Potential clients are often under the impression that in a Chapter 13 you must pay 100% of your debt back. Some clients pay as little as 5% -10% of their total debt. Your payment is completely dependent on your income and expenses. Every client has different income, different payroll deductions and different expenses, therefore different plan payment amounts.
One of the major benefits to filing the bankruptcy is the automatic stay – creditors cannot sue you or pursue collection efforts against you while you are in bankruptcy which is not the case in debt consolidation. Second, potentially not all creditors file claims in the case and that debt gets discharged without a payment. Third, interest stops accruing when you file the bankruptcy, so you are not making interest only payments indefinitely and you know your plan will be completed in five years and you will be debt free.