How Much Do You Have to Be In Debt to File Chapter 7?
Nobody ever wants more debt than they can handle. And many people keep their debt under control. However, a vast portion of the country falls into intolerable debt problems. They may lack the income to pay all their debts and fall behind. This situation feels like a trap for most people.
However, Chapter 7 bankruptcy can help you. This process helps to discharge most of your debt and gives you a clean start on life. But how much do you have to be in debt to file Chapter 7? And what steps do you take to file and qualify? Let's take a look at this process to help you get out of debt.
Among the two forms of bankruptcy, Chapter 7 requires fewer qualifications. In fact, their debt guidelines provide a surprising amount of leeway for those who qualify.
Simply put, Chapter 7 requires no minimum or maximum debt.
As a result, you could declare bankruptcy on debt as small as $5,000 if it qualifies. Or you could declare bankruptcy on hundreds of thousands or even millions.
By contrast, Chapter 13 possesses a few limitations. Like Chapter 7, Chapter 13 requires no debt minimum. However, it does possess two high-end limitations. These include unsecured and secured debts. Amounts change each year, depending on the current financial situation. These levels include Chapter 13 debt threshold of $2.75 million. Secured debts include things like mortgages and car loans. Secured debt possesses some form of collateral that the lending firm can take if a borrower misses bills. In the case of mortgages and cars, the home and the vehicle are collateral.
We'll talk more about Chapter 7 and Chapter 13 differences shortly. First, however, it is essential to emphasize that not every debt situation qualifies for Chapter 7. No minimum or maximum doesn't mean that everybody automatically qualifies. Instead, Chapter 7 features multiple qualifying factors you must understand. Otherwise, you're likely to fail to receive this financial help.
The government requires you to possess an income lower than that of your state for your house size. Or your disposable income must be too low to qualify for Chapter 13 bankruptcy. They use the means test to rate these factors before approving your bankruptcy. We'll discuss this test in more depth later. Right now, you need to gather the necessary forms to start.
Necessary Forms For Filing Chapter 7 Bankruptcy
Before filing for bankruptcy, you must know what forms to complete. Your lawyer will help you gather these items and fill them out. You then file them with the court to support their decision process. They'll confirm the information on the forms and then move on with approval. Pick up the first form listed below and move to the others, as necessary:
The first means test form helps to gauge whether you fall below your state's median income for your house size
The second means test form helps you if you do not fall below the state's median income and want to qualify
Necessary for individuals who don't need to take the means test, such as military personnel and others
You may find these forms at your local city or state legal offices. Or you can download them from your state's bankruptcy website. Print out each document you need and fill them out with your lawyer. And follow the steps listed below to get the best results for your financial needs.
Filing For Chapter 7 Bankruptcy
Now that you know how much do you have to be in debt to file Chapter 7, you can start the process. Most bankruptcy proceedings take little time to finish. However, improper filing procedures may complicate the process. You must follow each of the steps below to succeed. Work with your bankruptcy attorney to gather all relevant information for this process.
Step One: Filing a Petition
Find a bankruptcy lawyer who can help you with this process. They'll help fill out the paperwork required for filing for Chapter 7. This process includes collecting various financial information data about yourself. This information includes things like:
A complete and accurate listing of all your assets
A list of all of your debts and creditors
The amount of money you owe to each of these groups
A detailed income state prepared by your lawyer
Tax records and filings from the previous year
Evidence of credit counseling from an approved professional
After filing with the proper courts, several other steps occur. These all help to ensure you qualify and minimize any mistakes. However, you need to understand what kinds of debts you cannot discharge with Chapter 7. Unfortunately, the government does not allow a handful to be discharged.
Step Two: Understand your non-discharged debts
Chapter 7 discharges the vast majority of debt types. However, they don't allow you to discharge legally required debts. These costs must be paid. You can still file for Chapter 7 bankruptcy, however. You just won't include debts like:
Support payments to any of your spouses
Child support payments or debts
Most types of tax debts
Any money you owe the government
Fines, bail costs, or any other money owed due to criminal activity
Work with your lawyer to identify these debts. Include them on your debt list. Though you can't discharge them, their payments affect your financial situation. As a result, the court needs this information to help with their decision.
Step Three: Inform Your Creditors
After you file with the court, your creditors will learn of your filing. This process usually takes place within the court, which is why you list all of your debts in detail. Your creditors cannot stop this process legally. Once you submit and get approved, your debt with them is discharged.
However, some may try to settle with you outside of court. For instance, you may get offers to discharge your debt with a one-time payment. These payments include much lower amounts than your overall debt. Creditors attempt this step to get back at least some debt owed.
If you have the money, this option may be a good choice. It avoids bankruptcy and minimizes other financial complications. However, most people likely don't have the cash to pay. And you'd need to talk to the court about these payments before they approve your bankruptcy.
These steps may be meaningless if you do not pass the means test. This critical metric gauges whether you qualify for Chapter 7 bankruptcy. Understanding it helps to improve your chances of qualifying and can direct your bankruptcy process more smoothly.
Step Four: Performing the means test
The means test checks whether you have the means to pay your debt without bankruptcy. It gauges your overall debt level and your income. This information helps to give a better understanding of your ability to pay. Frankly, the means test process deserves a detailed run-down. Let's go over each of these steps to ensure you get the best results.
1. Comparing Your Income
First, the courts compare your income to that of the median income in your state. They take a look at your family size first before comparing. This step is essential. After all, a single-person household possesses more income flexibility than a one-income, five-person household. And income levels vary heavily between these households. Typically, more people mean both more income and debt.
The U.S. Census Bureau determines median household incomes a few times every year. They list this information on the Office of the United States Trustee's website. Courts check this number and compare it to your gross income. So what is your gross income? It is the money you make before taxes. Again, the court calculates this number, though you should do it yourself too.
The courts check your income for the six months before your filing. Collect your pay stubs and find the “gross” income listing on each. Add up these amounts and double them to get an idea of your gross income. Use this number to compare your income to the median in step three. Move to step two if you have any alternative or additional sources of income.
2. Adding in Extra Sources of Earnings
Don't forget that courts also look into all other sources of income. You must report these, or your case may be dismissed. These additional sources include:
- Overtime payments at an hourly job
- Alimony payments received from an ex
- Any income earned from a personal business
- Rental property income
- Unemployment benefits received when out of work
- Pension or retirement income of any kind
Don't list monthly SSI or SSDI income. It does not qualify for the means test. After you've calculated all of these payments, your wages are compared to the median.
3. Compare Your Income to the Median
Find the complete list on the UST website or work with your lawyer to identify the number. Does your income fall below the median for your state and home size? Then, you qualify for Chapter 7! Proceed with the rest of your case and follow the rest of the steps outlined below.
If you do not fall under that number, you need to do some extra work to qualify. Many people who do not pass the means test receive Chapter 7 every year. They must prove that they don't have enough disposable income to pay for at least 25% of their debts over five years. These debts include all unsecured and non-priority debts, including credit card payments.
Performing part two of the means test takes much more work. It proves that you do not qualify for Chapter 13 with its five-year payment plan. As a result, the necessary information includes a more in-depth examination of your financial situation. You'll need to work with your lawyer to ensure you qualify. The court will also examine these factors when approving your case.
4. Finishing Part Two of the Means Test
Part two of the means test provides a more in-depth analysis of your overall financial situation. They'll take your income and subtract various payments from it. This step helps to gauge your overall disposable income. They'll dismiss your case if you do not pass this test. However, they may suggest Chapter 13 as an alternative. They start by gauging your disposable income by subtracting these expenses from your gross income:
- Expenses established by the IRS, including food, clothing, out-of-pocket health care, housing, transportation, and utilities
- Payments to secured and priority debts, such as mortgage payments, house payments, and most types of tax debts
- Actual expenses, such as domestic support payments and other costs similar to this type of payment
- Administrative expenses related to the filing itself, such as the means test, court costs, and legal fees incurred during the process
The court subtracts all these payments from your gross income. Then, they multiply this amount by five and calculate 25% of your unsecured debts over the next five years. If your disposable income is high enough to cover this number, you do not qualify. However, you may qualify for Chapter 13 bankruptcy. This option helps many people overcome debt issues every year.
But what differences exist between these two chapters? And how does Chapter 13 help you? You deserve to know about all your options in this situation. So let's take a look at these factors below. Learning more about Chapter 13 will help those who do not qualify for Chapter 7.
The Differences Between Chapter 7 and Chapter 13
What is Chapter 7?
Chapter 7 lets you discharge your unsecured debts without having to pay them. While you may lose some properties to pay for these debts, some qualify for exempt property. The property you may lose include a variety of things, like:
Expensive and unnecessary items, such as coin or stamp collections
Family heirlooms worth money
Cash from your bank account
Stocks and bonds
Other types of financial investments
A second vehicle for the home
Extraneous vehicles, like motorcycles and boats
A second house or a vacation home
Exempt property includes things like your primary motor vehicle and home. You also keep reasonably necessary household goods and clothing. Appliances, pensions, and tools of your trade are also exempt. They cannot take a portion of your home's equity or public benefits. Personal injury awards are also exempt. Lastly, you most of your unpaid but earned wages.
The courts consider exempt items necessary for your well-being. Chapter 7 should help you financially, not drive you into homelessness. As a result, you typically keep your home and your primary transportation. You may also keep expensive items if they're necessary for your job. For instance, a traveling professional musician cannot lose their instruments in Chapter 7.
What is Chapter 13?
When you fail to qualify for Chapter 7, Chapter 13 may help. Chapter 13 bankruptcy creates a new series of repayments for your debt. Rather than erase your debt, it restructures it to make it easier to pay.
The courts set a five-year repayment plan for you. Working with your lawyer, they'll use your income data to produce a fair plan. Make your payments on time to handle your debt needs.
Obviously, most people prefer Chapter 7 bankruptcy. They want to avoid debt payments to get their life on track.
However, those who do not qualify may find Chapter 13 very beneficial. The courts set your repayment schedule to minimize financial struggles. Chapter 13 also lets you keep any properties that Chapter 7 would take from you. This bankruptcy option also helps you:
Handle a default on a mortgage
Pay for things Chapter 7 does not
Avoid considerable hits to your credit scores
Satisfy your debtors and yourself
Don't ignore this option if you do not qualify for Chapter 7. It helps pay off your debts and protect your property. But what if you do not qualify for Chapter 13 by having too-high debts? Other options exist for handling your debt and making your life easier. And we can help you find them.
Other Debt Management Solutions
Use our app to find debt consolidation lending professionals. These companies provide a fair and reasonable loan to pay off your current debt. In addition, they consolidate this debt into one payment to make it easier to handle. And we can help by providing a listing of these companies.
Download our app, sign up, and seek out debt consolidating lenders. Read about each option and gauge their value to you. For example, learn more about their interest rates, guidelines, and more. With our help, you can find a debt consolidation company that meets your needs.
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Take Control of Your Debt
Use Chapter 7 or Chapter 13 to take control of your debt. Doing so will help make life more enjoyable again. Just as importantly, it gives your children a better chance of a great life. So please talk to a specialist who can help you through this process. You deserve it!