People sometimes ask, how much debt do I need before I can file bankruptcy? Sometimes they phrase it, do I have too much debt to file bankruptcy?
The answer is simple. You can file for any amount of debt, and you can include any amount of debt, depending on what type of bankruptcy you file. But there are some limitations on the type of debt and under which chapter of bankruptcy you file.
Dischargeable Debts. The point of filing bankruptcy is to get a discharge, which is the court order saying you no longer are liable for the debts covered by the discharge. Some debts, most notably student loans, most types of taxes, and domestic support obligations (child support, alimony, etc.) are not dischargeable, meaning you’ll still owe them after your case is over. So, if your debts are mostly these types of debts, filing bankruptcy probably won’t help you.
What Chapter? This is the big question. Under which chapter of the Bankruptcy Code do you plan to file? Most people want Chapter 7, also known as straight bankruptcy. In Chapter 7 all your dischargeable debts are wiped out, gone forever. The problem is, you have to qualify for Chapter 7 by showing that you pass the Means Test. The Means Test compares your annual income, as calculated by the Means Test, against the median income of a household of your size in your county. If your income is above the median, you aren’t qualified for Chapter 7 (there are some exceptions, which we’ll talk about in another post later). In that case you are forced into Chapter 13.
In Chapter 13, there are limitations on the amount of debt you can have. Unsecured debts cannot exceed $419,275; and secured debts cannot exceed $1,257,850. Additionally, in Chapter 13, you must have enough income after paying your monthly living expenses to pay back what is required. The amount of monthly payment and the amount required to be paid back is unique to each case; there is no formula that will tell you without an analysis of all your debts, income and property, which is the main job of your bankruptcy attorney.
As you can see, in rare circumstances, it is possible that a person doesn’t qualify for Chapter 7 because she makes too much money to pass the Means Test, and doesn’t qualify for Chapter 13 because she has too much debt. In such a case the only other option would be to file Chapter 11, which is a hugely cumbersome undertaking and very expensive. Fortunately, almost no one gets caught in the area between Chapters 7 and 13.
What type of debt? Besides the fact that some debts are nondischargeable, the nature of dischargeable debt also factors into which type of bankruptcy to file, or whether you should file at all.
Unsecured debt is the easiest to get rid of. This includes credit cards, medical bills, open accounts at stores and personal loans. An unsecured debt means the creditor has no collateral to pursue. There are rarely any repercussions from filing bankruptcy against unsecured debt.
Co-signed debt. Where a co-signer exists, such as a parent, non-filing spouse, friend or other party, the creditor can go after the co-signer for the discharged debt. In this case, filing Chapter 7 might not be the best option, even if the debt is unsecured and the debtor qualifies for Chapter 7.
Secured debt. Secured debt means the creditor holds collateral, such as a car or mortgage. The collateral for the debt passes through the bankruptcy unscathed. This means that even though the debtor no longer must repay the debt, the creditor is still entitled to the collateral, and can repossess the car or other personal property, or foreclose the mortgage. If a deficiency exists after the creditor sells the collateral, that deficiency is subject to the bankruptcy discharge and cannot be collected. If you are buying something and are underwater (meaning you owe more than the collateral is worth) you can surrender (give back) the collateral and receive a discharge for what remains owed. However, if you want to keep the collateral, you must reaffirm the debt, meaning you sign an agreement with the creditor saying that even though you filed bankruptcy, you agree to pay that particular debt. You will not receive a discharge for any reaffirmed debt.
Taxes. Most tax obligations are not discharged in bankruptcy. The exception is income taxes that are more than three years past due and for which a return was filed on time, including any extensions. If you have tax debt of this nature, it is possible to discharge it. Any other tax debt is not dischargeable.
Make the bankruptcy worth it. Bankruptcy is not something to do lightly. Generally you can file only every eight years. Make sure now is the time. When the right time is depends on you and your circumstances. Here are some things to consider.
Conclusion. The decision to file bankruptcy is not easy. There’s no one factor that will answer the question, should I file? If you need help assessing your situation and options, please contact us.
For additional information, see this good article.