How Much Debt Does It Take to File for Bankruptcy?

Bankruptcy serves as a legal process designed to offer individuals relief from overwhelming debt. It provides a structured path for those facing severe financial distress to reorganize their finances or discharge certain debts, allowing for a fresh start. This article will guide readers through the financial considerations and initial steps involved in determining if bankruptcy is a viable option for their situation.

Understanding Bankruptcy Eligibility Requirements

There is no specific dollar amount of debt that automatically qualifies an individual to file for bankruptcy. Instead, eligibility is determined through an assessment of an individual’s financial picture, including their income, expenses, and assets in relation to outstanding debts.

A primary component of this assessment is the bankruptcy means test, particularly for those considering Chapter 7 bankruptcy. This test compares an individual’s current monthly income (CMI) to the median income for a household of the same size in their state. If the CMI falls below the state’s median, the individual qualifies for Chapter 7.

For those whose CMI exceeds the state median, the means test proceeds to a second step. This step involves calculating disposable income by subtracting certain allowed expenses from their income. If there is insufficient disposable income to repay a significant portion of unsecured debts over a five-year period, Chapter 7 eligibility may still be granted. If disposable income is substantial, Chapter 13 bankruptcy, which involves a repayment plan, may be the more appropriate path.

Current monthly income (CMI) is calculated based on the average income received over the six calendar months preceding the bankruptcy filing. This includes wages, salaries, business income, rental income, and other regular contributions to household expenses.

Asset considerations also play a role, particularly in Chapter 7 filings. Debtors must disclose all assets, categorized as either exempt or non-exempt. Exempt assets, such as certain equity in a home or vehicle, are protected, while non-exempt assets may be sold by a trustee to repay debts.

Types of Debt and Their Treatment

Understanding how different types of debt are treated in bankruptcy is important. Debts are categorized as dischargeable or non-dischargeable, and also as secured or unsecured, which affects their treatment within the bankruptcy process.

Dischargeable debts are those that can be eliminated through bankruptcy, providing relief from repayment. Common examples include credit card debt, medical bills, personal loans, and older utility bills. Most judgments not related to fraud or intentional harm are also dischargeable.

Conversely, certain debts are usually not eliminated through a bankruptcy filing and must still be repaid. These non-dischargeable debts include most student loans, though discharge is possible under a very high standard of undue hardship. Most tax debts, especially recent ones, child support obligations, and alimony payments also remain. Debts incurred through fraud, willful and malicious injury, or government fines and penalties are not discharged.

The distinction between secured and unsecured debt further clarifies how obligations are handled. Secured debt is backed by collateral, such as a mortgage on a house or a loan on a vehicle. While bankruptcy can discharge the personal liability for a secured debt, the lien on the collateral typically remains, meaning the asset could still be repossessed if payments are not continued or the debt is not reaffirmed. Unsecured debt, like credit card balances, is not tied to specific collateral and is discharged in bankruptcy.

Preparing Your Financial Information for Filing

Before initiating a bankruptcy filing, individuals must gather financial information and documents. This step ensures accurate completion of required forms and allows the court and trustee to assess financial standing.

Proof of income (pay stubs for six months, tax returns for two years).
Complete list of creditors, including account numbers and amounts owed.
Inventory of all assets: real estate, vehicles, bank accounts, investments, retirement accounts, and significant personal property (e.g., jewelry, collectibles).
Breakdown of monthly living expenses (housing, utilities, food, transportation).
Disclosure of any property transferred or sold in the past two years.
Details of any prior bankruptcy filings, including dates and outcomes.

The Initial Steps of Filing for Bankruptcy

Once all necessary financial information has been gathered and the mandatory pre-filing credit counseling course completed, the formal process of filing for bankruptcy begins. This stage involves submitting the petition to the court.

The initial step involves completing the official bankruptcy forms, which require entry of all financial data previously collected. These forms detail the debtor’s assets, liabilities, income, and expenses, providing a financial overview to the court.

After the forms are prepared, the bankruptcy petition and accompanying schedules are submitted to the appropriate bankruptcy court. This can be done in person, via mail, or electronically. The location of filing is determined by the debtor’s residence.

A filing fee is required at the time of submission. For a Chapter 7 filing, this fee is $338, while for a Chapter 13 filing, it is $313. In some circumstances, debtors may be eligible to pay these fees in installments or, in Chapter 7 cases, apply for a fee waiver if their income is below a certain threshold.

Upon filing the bankruptcy petition, an automatic stay immediately goes into effect. This legal injunction temporarily halts most collection activities against the debtor, including lawsuits, wage garnishments, and collection calls from creditors. Shortly after filing, a bankruptcy trustee is appointed to administer the case, overseeing the debtor’s assets and ensuring compliance with bankruptcy laws.