Is the Amount of Debt Owed Related to Filing for Bankruptcy

by Bill on April 16, 2012

It is a common misconception that you need a certain amount of debt to file bankruptcy. Filing for bankruptcy has no rule on the amount of debt owed. The inability to repay your debts is what makes the bankruptcy filing necessary. Your situation will determine if you file for Chapter 7 or Chapter 13 with the two main determinations being your income and ability to repay debts.

Bankruptcy Myths

Beyond the misconception that you can’t go bankrupt if you owe taxes, which I covered in a post about Bankruptcy and the IRS, the other myth is that you will loose your home if you file bankruptcy. Both are false.

  • The IRS becomes a creditor in a bankruptcy proceeding just like everyone else. So your past-due taxes are now considered part of the bankruptcy.
  • You can file exemptions to keep necessary items such as your primary residence, tools, work related items or vehicle if you must have them to maintain income.

Filing for Chapter 7 Bankruptcy

At one time Chapter 7 was the most common personal bankruptcy form filed. Why? Because the debt owed was often dismissed and the debtor ended up owing nothing regardless of the ability to pay any of the debt back. People would run up thousands of dollars in credit card debt and walk away free and clear. The reason was that creditors could only recover losses from available assets that you claim in court. Not so much today.

Filing for Chapter 13 Bankruptcy

Chapter 13 bankruptcies take into account your stable income and the ability to repay debt. This is the bankruptcy filing most creditors would like to see everyone file, although its not always possible. This is where the mortgage foreclosure mess of 2009 struck and caught so many people.

Which Chapter Can I File For?

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 created a ‘means test’ and a ‘best effort rule’ as a way to filter out those who were actually able to repay some of the debt.

The ‘Means Test’

This test is set up in two parts, of which you must pass both to file for Chapter 7.

  • Your overall income is used to determine if you can repay at least 25 percent of unsecured debt such as credit card debt. The court subtracts needed exemptions such as rent, food and utilities from your income before anyone else is paid.
  • Your income is then compared to the median income for your state. If your income is greater than the median income, you must file for Chapter 13 bankruptcy, if you are under you are allowed to file under Chapter 7.

The ‘Best Effort’ Rule

This bankruptcy rule was designed so you, as the debtor, attempt your best effort to repay unsecured debt. Under the Best Effort rule creditors receive a repayment plan that gets them at least what they would have gotten under Chapter 7. The court uses your disposable monthly income to determine your ability to repay; all monthly disposable income is put into repayment since it is deemed as a high priority to get you out of debt. To find your disposable monthly income the court uses a calculation.

  • For debtors under median income the monthly disposable income is multiplied by 36
  • For debtors over the median income the monthly disposable income is multiplied by 60

The answers to all this math tells the court and you how much, and how long, the payments will be.

Priority Debt and New Debt

Any mortgages, leases, taxes or support payments you have are considered priority debt and are taken out of the total monthly income before the math is done for the unsecured debt. So, you shouldn’t loose your property or wind up in more trouble due to repayments.

But, at the same time, the law also requires you to seek a judge’s approval to take on any new debt. If home repairs are needed, tools or a car to maintain income, you can usually get this.

Here’s a few references to look over that give you a much better idea of how much debt is required to file bankruptcy.


Moran Law – Bankruptcy Myths

Moran Law – Chapter 13

NOLO – Chapter 7

CNN/Money – Bankruptcy Law

William Swan, writer

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