How Much Debt Do I Need To File for Chapter 7 Bankruptcy?

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If you’re struggling with a massive amount of debt, Chapter 7 bankruptcy could be a way to reduce or eliminate it and help you get back to normal life. There’s no minimum amount specified in federal bankruptcy law, but bankruptcy should be considered a last resort when all other means to pay back the debt fall short; this process has severe financial and credit consequences that take years to recover from, but it is nevertheless an option for those with no others left.

Chapter 7 Filing Eligibility

Even though there isn’t a federally-specified minimum amount of debt that Chapter 7 filers must meet, there are other eligibility requirements to be mindful of.

In all cases, prospective filers must pass a means test to determine if they are eligible to proceed. Rather than how much debt you have, your income is the key metric; if you make less than the income limits, you can file for Chapter 7 bankruptcy. Otherwise, you’ll need to take a second means test, the metrics for which are a bit more complicated.

You must also complete a credit counseling course before you file, as well as a financial management course before your debt can be discharged, effectively erasing all the debts that qualify under a Chapter 7 case. Note that you may also only file for bankruptcy once every eight years.

If you’re unable to pass either means case, you can instead file for Chapter 13 bankruptcy.

Chapter 7 vs. Chapter 13

These two chapters handle debts differently, so the process itself varies as well. Chapter 7 is better for individuals struggling with mountains of unsecured debts, such as medical bills or credit card bills. As long as you meet and complete the requirements, it takes about four to six months to fully discharge those debts.

With Chapter 13, your debts are instead reorganized so that you make monthly payments to your creditors over three to five years, which means this form of bankruptcy naturally takes much longer. Still, it may be preferable for those with secured debts or property that they don’t want to lose. To qualify, you must have enough disposable income to make the payments for the entire plan.

Another important difference is that there isn’t a limit to how much debt you can discharge under Chapter 7, which isn’t the case for Chapter 13. Its debt limits are updated every three years; most recently, Chapter 13 limits were updated in April 2022 to $465,275 for unsecured debt or $1,395,975 for secured debt.

Will Your Debts Qualify?

Most filers’ debts are unsecured, which means they don’t have any collateral locked down to secure repayment. This is generally the case for lines of credit, credit cards, and personal loans. These types of debt permanently discharge under Chapter 7 bankruptcy, so it’s potentially a great source of relief for those who don’t have other kinds of debt.

Remember, federal bankruptcy law doesn’t specify a minimum or maximum on unsecured debt that can be discharged under this chapter. In fact, the amount of debt you have isn’t part of the means test at all; only your income is.

However, if you have secured debts like a mortgage or a car loan, you won’t be able to discharge those and keep the property under this chapter. This property is a means of securing repayment of the debt, so in order to keep it, you either need to keep paying the debt as promised before, during, and after a bankruptcy case.

Alternatives to Bankruptcy

It’s easy to feel trapped when you’re under a lot of debt, but the good news is that you have several options to consider before bankruptcy:

  • Debt management: In a debt management plan, a credit counseling agency works with your creditors to negotiate a payment plan that you can afford. It only works with unsecured debts.
  • Debt consolidation: With debt consolidation, an agency combines multiple debts into a single obligation to think about. This is common for those who have multiple student loans to simplify repayment, but you can also consolidate credit card debt and other kinds of loans.
  • Debt settlement: You can sometimes settle your debt for less than what you owe by offering a lump-sum payment. This usually only works for credit cards and similar unsecured debts.

Think about how much debt you have, interest rates, and how long it would take to repay when you consider each of these options. Sometimes you won’t ever be able to repay a debt on your own without some help, but you can nevertheless try to become debt-free.

If you’re stuck under an insurmountable amount of debt with no other options left, Chapter 7 bankruptcy may be the next step for you. Remember, federal law doesn’t limit the amount of debt you can discharge in this chapter. Consider consulting with a bankruptcy attorney or credit counselor to discuss your questions.