How Much Debt Do You Need to File for Bankruptcy?

Navigating financial distress often leads individuals to consider bankruptcy. A common question is how much debt is necessary to file. There is no single dollar amount that qualifies or disqualifies someone. Eligibility is a complex determination, involving a detailed assessment of an individual’s financial situation, debt types, and income.

Qualifying Debt Levels

No universal minimum or maximum debt amount automatically qualifies someone for bankruptcy. The type of bankruptcy an individual seeks plays a significant role in determining any applicable debt limitations. Chapter 7 bankruptcy generally does not impose specific debt amount limits; eligibility is primarily assessed through income and asset evaluations.

Chapter 13 bankruptcy, which involves a repayment plan, does have specific statutory debt limits. For cases filed on or after June 21, 2024, individuals must have unsecured debts totaling less than $465,275 and secured debts less than $1,395,875. These amounts are subject to periodic adjustments by law to account for inflation. Exceeding these limits means Chapter 13 may not be an option, but it does not preclude other forms of bankruptcy protection.

These debt thresholds are designed to ensure Chapter 13 remains accessible to individuals with regular income who can manage a structured repayment plan. The limits apply to noncontingent and liquidated debts, meaning debts that are certain and for which the amount is clearly determined. If a person’s debts surpass these figures, they might need to explore Chapter 11 bankruptcy, which is typically more complex and costly.

Classifying Your Debts

Understanding the categories of debt is as important as knowing the total amount when considering bankruptcy. Debts are generally classified based on whether they are tied to collateral, their legal priority, and their dischargeability. This classification significantly influences how debts are treated within a bankruptcy proceeding and which obligations may be eliminated.

Secured debts are those linked to specific assets, such as mortgages on real estate or auto loans on vehicles. While bankruptcy can discharge the personal obligation to repay these debts, the creditor’s lien on the collateral typically remains. This means that if the debtor wishes to keep the asset, they generally must continue making payments or find an alternative arrangement.

Unsecured debts, conversely, are not backed by collateral and include obligations like credit card balances, medical bills, and personal loans. These types of debts are often discharged in Chapter 7 bankruptcy, providing a significant fresh start for many individuals. However, some unsecured debts are designated as priority debts, receiving preferential treatment under bankruptcy law. These include certain tax obligations, child support, and alimony.

Priority debts are generally not dischargeable in Chapter 7 and must typically be paid in full through a Chapter 13 repayment plan. Furthermore, certain non-dischargeable debts cannot be eliminated through bankruptcy, regardless of the chapter filed. Examples include most student loans, debts incurred through fraud, and obligations arising from driving under the influence. The composition of one’s debt portfolio directly impacts the potential outcomes of a bankruptcy filing.

Income Requirements for Eligibility

An individual’s income level plays a substantial role in determining eligibility for specific bankruptcy chapters, particularly Chapter 7. This assessment helps ensure that bankruptcy relief is provided to those who genuinely need it, rather than those who can reasonably repay their debts. The primary tool for this evaluation is the Means Test, designed to identify debtors with sufficient disposable income to fund a Chapter 13 repayment plan.

The Means Test begins by comparing the debtor’s current monthly income, calculated over the six calendar months preceding the bankruptcy filing, to the median income for a household of the same size in their state. If the debtor’s income falls below the state median, they typically qualify for Chapter 7 bankruptcy. This initial step serves as a quick screening to allow individuals with limited financial means to proceed.

If the debtor’s income exceeds the state median, the Means Test proceeds to a second step, which involves a more detailed calculation of disposable income. This part of the test allows for deductions for certain allowed expenses, such as housing, transportation, and healthcare costs, to determine if there is enough remaining income to make significant payments to unsecured creditors. If the calculated disposable income is too high, a “presumption of abuse” arises, indicating that Chapter 7 may not be appropriate.

For those pursuing Chapter 13, income also dictates the structure of their repayment plan. Debtors must propose a plan to repay a portion or all of their debts over a period of three to five years, based on their disposable income. The plan must demonstrate that the debtor can afford the proposed payments, ensuring a feasible path toward financial reorganization.

Additional Eligibility Considerations

Beyond debt amounts, debt types, and income, several other factors influence an individual’s eligibility for bankruptcy. These considerations are general prerequisites that debtors must meet to successfully navigate the bankruptcy process. They are designed to promote responsible financial behavior and prevent abuse of the system.

One significant consideration involves prior bankruptcy filings. There are specific time restrictions between successive bankruptcy filings, designed to limit repeated discharges of debt:
Eight years from the filing date of a previous Chapter 7 case to receive a discharge in another Chapter 7.
Four years from the Chapter 7 filing date to file Chapter 13.
Six years from the Chapter 13 filing date to file Chapter 7.
Two years between consecutive Chapter 13 filings.

Another requirement is the completion of mandatory credit counseling. Individuals must receive a briefing from an approved non-profit budget and credit counseling agency within 180 days before filing for bankruptcy. This counseling aims to explore alternatives to bankruptcy and provide financial management guidance. A certificate of completion from this course is a prerequisite for filing.

Following the bankruptcy filing, debtors are typically required to complete a debtor education course before their debts can be discharged. This personal financial management course focuses on budgeting, money management, and responsible credit use to help individuals avoid future financial difficulties. Like credit counseling, this course must be obtained from an approved provider, and a certificate of completion is necessary for discharge.

Finally, residency requirements dictate where an individual can file their bankruptcy case. Generally, a debtor must have resided in the district where they are filing for the greater part of the 180 days immediately preceding the filing. More stringent residency rules apply when determining which state’s exemption laws can be used to protect property, often requiring domicile in a state for at least 730 days (two years) before filing.