How much debt for Chapter 7? There is no minimum amount of debt, but it is not the only option. You should think about other issues, though, to decide if it’s the best path. It:
- Is a liquidation bankruptcy
- Has a means test based on your income and residence
- Is not necessarily bad; it depends on your situation
It is a difficult process. You should think about whether you really can’t pay your debts on your current income before you decide what to do.
What Does Chapter 7 Mean?
Chapter 7 is a type of bankruptcy that liquidates possessions and wipes out most of your unsecured debt. If you’re behind on your bills and can’t afford monthly payments and living expenses this might be something you should consider. The court:
- Places a temporary stay on current debts.
- Takes legal possession of your property.
- Appoints a trustee to oversee your case.
The trustee reviews your assets and finances. They sell the property that the court won’t let you keep. Each state has its own rules about what you can keep (exempt) and what it can sell (nonexempt). He/she uses the proceeds to pay back your creditors. He/she also arranges the meeting of creditors where you go to the courthouse and answer questions under oath about your situation.
The process takes about 4-6 months. In the end, the court discharges your remaining debt. Remember, though, that the court can’t discharge some kinds of debt, such as child support, alimony, taxes, court fees, and student loans.1
How to Qualify
How much debt for Chapter 7? Qualifications vary by state. However, you should prepare for a difficult process that damages your credit and forces you to sell possessions. Here are some general guidelines that you need to consider:
- Complete bankruptcy counseling within 180 days before filing.
- Pass a means test to see if your income exceeds your state’s maximum.
- File a petition with your local court. This includes paying fees up to several hundred dollars.
- Attend a creditor meeting with your trustee and creditors where you answer questions about your debt, property, and finances under oath.
- Complete a financial management course within 60 days of the first date set for your Meeting of Creditors.
After you fulfill these you receive your discharge. This permanently stops creditors from collecting on the specific debts that the court discharged. The court cannot and will not discharge all your debts.2
The maximum income for Chapter 7 depends on the state and your financial situation. You must take a means test using a set of forms to determine eligibility. Those forms are:
- 122A-1: Statement of Your Current Monthly Income
- 122A-2: Means Test Calculation
- Statement of Exemption
Everyone who applies must fill out Form 122A-1. Based on your answers you probably need to fill out Form 122A-2. This is the actual means test. If you think you may be exempt from the means test for some reason, you also need to fill out the third Statement of Exemption Form.
Statement of Your Current Monthly Income: Form 122A-1
Everyone filing for Chapter 7 bankruptcy needs to fill out this form. If you are married and filing together some areas have you fill out one form, while others make you fill out one for each spouse. Here are the sections you need to provide:
- Case information – You need to fill out your name, court you filed in, and case number. The United State Courts have a locator tool where you can enter your zip code and find your local court. On the first screen only enter your zip code. On the next screen, there is a Refine Search column on the right. Select Court Type in that column and then select Bankruptcy to find where you should file. If you don’t have a case number yet leave that field blank.
- Marital and filing status
- Income – You need your average over the last 6 months and a list of any other types. Generally, any deposit into your bank account is income.
- Calculate your total annual income – Take the monthly you just calculated and multiply it by 12. Take your annual and compare it to your state’s median income.
The U.S. Department of Justice has a website where you can find your state’s median income. Enter the appropriate time period on this page (the most recent if you are filing a new application). Next, click on the link for Median Family Income Based on State/Territory and Family Size; it’s in section I. On the next page find your state and then use the number for your appropriate family size.
If your income is lower than your state’s median, then you may qualify. If it’s greater, then you must fill out the next form.
Means Test Calculation: Form 122A-2
This focuses on your disposable income based on your calculations in the previous form. If your income is higher than your state’s median you must fill this out. This is the actual means test, and it determines how much money you have for paying off debts. On this form you need to:
- Fill in your case information – This is the same as in 122A-1.
- Determine adjusted income – copy your current monthly income from before and follow the instructions.
- Calculate deductions from your income – Provide detailed information about your debts and expenses.
It asks for many different types of information, and it gets very complicated. Credit Karma has an excellent page that explains in detail the information you should provide. Read each question carefully and make sure you enter the information accurately. If you get confused about what it’s asking for then you may need to find a bankruptcy lawyer.
Is It Bad to File Chapter 7?
How much debt for Chapter 7? While filing indicates personal financial problems, it is not always bad. People find themselves facing this for many different reasons. Job loss, accidents, and serious medical emergencies are all common events that cause bankruptcy. In these situations, you should seek relief. On the other hand, some can afford to pay off their debt with some belt-tightening, but they make a bad choice. Also, some people seek to defraud their creditors.
Your situation is unique, and you need to think hard about whether you can change your habits and pay your debts, or you really can’t. You should only file if you cannot pay your bills with your current income because it’s a very hard process. In addition, it damages your credit for years to come.3