How much debt do you need to have to file for bankruptcy?

Minimum debt requirements for bankruptcy

Specific debt requirements may apply when you file for bankruptcy. With Chapter 7 bankruptcy, no minimum amount of debt is required. However, Chapter 13 bankruptcy stipulates that your total secured and unsecured debts must be less than $2.75 million as of the bankruptcy filing date.

Regardless of whether there is a debt requirement, the court looks at factors like your total debt, type of debt, credit history and income. Together, these factors help form your bankruptcy agreement and debt settlement.

Types of bankruptcies and their requirements

There are several types of bankruptcy. However, we will focus on the most common types of bankruptcy, which are Chapter 7 and Chapter 13.

Chapter 7 bankruptcy

When you cannot pay your debts, Chapter 7 is an option that allows you to file for a discharge of debts, regardless of how much you owe. This means that you will no longer be responsible for repayment to creditors, but you may lose some of your assets to repay that debt. Not all debts may be discharged, however. Chapter 7 also does not negate a lien on property.

Chapter 7 is sometimes called liquidation bankruptcy.

Individuals, as well as partnerships, corporations and other business entities, are eligible to file. However, you may not be able to file for Chapter 7 bankruptcy if you have filed bankruptcy within the past 180 days. You must also complete a credit counseling course approved by the court.

Chapter 13

Chapter 13 bankruptcy takes a different approach. Instead of liquidation, you repay your debts by enrolling in a debt repayment plan as ordered by the court.

Also known as a wage earner’s plan, Chapter 13 works like a debt management plan, allowing those with regular income to enroll in a repayment plan. This lasts either three or five years, depending on your total income. In the meantime, collection efforts are stopped to allow you time to repay.

The requirements to file are similar to Chapter 7. You also must receive credit counseling from an approved service. Additionally, you must be current on your tax returns and show proof of regular income, proving you can make regular payments when paying off your debt.

Is Chapter 13 worth it?

Chapter 13 is a popular type of bankruptcy because, unlike Chapter 7, you can usually keep your assets (like your home or car). It allows you to pay off debts by consolidating them into one monthly payment, making repayment more manageable while allowing you to keep your most important assets.

However, Chapter 13 requires a repayment plan, so you must commit to regular payments over an extended period of time. If you do not have a steady income, Chapter 7 may be a better option.

At the end of the day, the decision of whether filing Chapter 13 is worth it depends on your financial situation. If you can’t meet the requirements of a repayment plan, Chapter 7 may be a better option to liquidate your assets, eliminate your debt and get a fresh start.

How long does bankruptcy stay on your credit report?

Bankruptcy can stay on your credit report for up to ten years or longer, depending on the type of bankruptcy you file and whether you meet your repayment obligations. Chapter 7 bankruptcy generally stays on your credit report for up to seven years, while Chapter 13 can last up to ten years or more.

Long-term effects of bankruptcy

The decision to file for bankruptcy is not an easy one. There are several long-term effects that can affect your credit for some time to come.

Loss of assets

One of the biggest drawbacks of bankruptcy is that you may lose your assets. Chapter 7 is one type of bankruptcy that requires you to sell some assets in order to repay your debts. If you do not want to risk important property like your home or car, the repayment plan Chapter 13 offers may be a better solution. However, even this repayment plan could result in the loss of assets if you are unable to afford your monthly payments.

Credit score impacts

Bankruptcy significantly impacts your credit report, lowering your credit score and making it harder to get loans in the future. Chapter 13 typically can stay on your credit report for up to seven years, with Chapter 7 lasting up to ten years. Payment history is the biggest factor in determining your credit score, so while bankruptcy may cause your score to plummet, you should be able to fix your credit over time with regular payments and healthy financial habits.

Leftover debt

Your bankruptcy may not cover all types of debt. You may have some loans that are not eligible for discharge, leaving you with leftover debt. Be sure to work this debt into your monthly payments — otherwise, you risk further damage to your credit score when you are working to improve it.

Bottom line

Filing for bankruptcy may be worth it if you have a large amount of debt that you cannot pay. You can use your belongings or a repayment plan to stop collection efforts and repay your creditors. However, it has major impacts on your credit score — it’s important to consult an attorney before filing.