A pressing financial crisis can leave a person grappling with limited options for debt relief. In such dire circumstances, bankruptcy emerges as a potential lifeline, offering a chance for a fresh start. In fact, the Administrative Office of the U.S. Courts reports that over 400,000 people filed for bankruptcy in 2023.
However, bankruptcy is a highly regulated process, and many people have misconceptions about it. Therefore, anyone considering this resolution should understand whether it has a minimum debt limit.
Is there a minimum debt limit for bankruptcy?
Contrary to what some believe, bankruptcy does not hinge on a predefined debt threshold. As a result, a person does not necessarily need to have a colossal debt burden to take this legal maneuver.
Instead, the ability to declare bankruptcy relies on other financial factors, particularly an individual’s ability to repay debts. One’s finances and income dictate whether the person can file for Chapter 7 or 13.
Who qualifies for Chapter 7?
Chapter 7 mainly involves the liquidation of assets and the elimination of most debts. This option is for those whose income falls below the state’s median and can pass the means test, which assesses the ability to repay debts.
However, the individual will still be responsible for specific debts and expenses, such as:
- Spousal and child support
- Personal injury debts due to one’s intoxication
- Certain tax debts
- Secured debts
Filing for Chapter 7 does not automatically discharge student loans either, but the possibility exists if the individual can prove undue hardship.
Who qualifies for Chapter 13?
Conversely, Chapter 13 is the reorganization chapter, which provides a structured approach to debt settlement. The filer typically has a reliable income source and can follow a court-approved repayment plan spanning 3 to 5 years.
Moreover, Chapter 13 allows for the retention of more assets during the recovery process. This arrangement can relieve the pressure from collectors off a person and make a debt load more manageable.
For those grappling with an unmanageable debt situation or facing uncooperative creditors, bankruptcy can provide a pathway to financial recovery. The absence of a minimum debt limit ensures that individuals across income spectrums can explore this legal avenue.