For many of us that are behind on our bills and being hounded by debt collectors, our financial situation could stress us out so much that we’d consider filing for bankruptcy just to make it all go away.
“But just how much debt does it take to file bankruptcy,” you ask yourself. When do you need to file a bankruptcy case? Read the entire article to know if bankruptcy can help you.
How Much Debt Do I Need to File Bankruptcy?
There is NO MINIMUM debt to file for bankruptcy. Many people may not be aware of this but the laws don’t specify any minimum amount. There’s also NO MAXIMUM amount of debt needed to file for a Chapter 7 bankruptcy. This means that whether you have $10,000 or $100,000, you can file for this type of bankruptcy.
On the other hand, there’s a maximum debt that you can organize if you are filing Chapter 13 bankruptcy. The limit amount changes every year. In 2020, the limit for unsecured debts was $419,275 while the limit for secured debts (mortgage, car loans, etc.) is $1,257,850.
What amount of debt should you have before considering bankruptcy? There’s no dollar amount that would make filing for bankruptcy the right or wrong option for you. Rather, you should look at your financial situation and whether you can salvage it before trying the nuclear option (bankruptcy).
In general, you should consider bankruptcy debt relief if:
- Your total monthly income isn’t enough to pay your debts
- Your creditors sue you
- Your creditors garnish your wages
- Your creditors harass you
- Your lender will repossess or foreclose your property
Factors to Consider Before You File for Bankruptcy
Before you file for bankruptcy, consider the following:
1. Are You Qualified To File for Chapter 7 Bankruptcy?
You have to pass the “bankruptcy means test” before your bankruptcy relief filing will be approved. If you live in California, for example, the median family income in your state for April 2020 to April 2021 for a family of two people is $79,271. This means your monthly income has to be less than $6,605 to file for bankruptcy. If your income is lower than the median income, this means you pass the test.
If your income is higher than the median amount, you can still do a means test where you deduct all of your expenses, such as your taxes, housing expenses, child care, utilities, etc. After that, you will be able to see whether you have sufficient income left to pay your debts. If not, you may qualify for bankruptcy under Chapter 7. Otherwise, your next option is to file a Chapter 13 bankruptcy. Again, you have to meet the maximum amount of debt that you can reorganize for this type of bankruptcy.
You can check out this median income table that covers bankruptcy filings from November 1, 2020, onwards. Note that these figures are constantly being updated.
2. What Types of Debt Do You Have?
Not all kinds of debts can be eliminated even if you file bankruptcy. If you’ve heard that filing a Chapter 7 will erase all of your debts through bankruptcy discharge, this could be true if all your debts are unsecured debts. These are debts that you incurred without any collateral, such as credit card bills, medical bills, and personal loans. If you have secured debts like a car loan or a mortgage, these are nondischargeable debts.
If you have nondischargeable debts, you can’t get out of paying them. Examples of debts that cannot be discharged include student loans, federal and state tax debts, child support, debts from fraud or embezzlement, and domestic support obligations.
Assess what kind of debts you have. If most of your debts are nondischargeable, then bankruptcy might not be the solution for you. You’ll end up paying most of your debts anyway even with a bankruptcy case.
3. Can You Get Out Of Debt Without Filing for Bankruptcy?
Before you decide to file bankruptcy, you should first determine if you can repay your debts through other ways. You may tap the assistance of a credit counseling agency for free bankruptcy evaluation to know if a debt management program can help you pay off your debts. You can check the list of agencies that the US Trustee approved.
4. Can You Save Your Assets?
This consideration is for people whose properties are non-exempt from repossession. Does your state offer much protection about being able to keep your home, your car, or your other essential assets after a bankruptcy? Otherwise, you could file for a Chapter 13 to reorganize your debts. This way, your nondischargeable debts will not be immediate and you will have a repayment plan to manage your debts much better.
If most of your debts are credit card bills and you do not have any major assets like a house or a car that you would like to keep, then Chapter 7 may be the better debt relief option for you.
5. Can You Negotiate a Deal With Your Creditors to Settle Your Debt?
Try to negotiate a deal on how to best settle your debt with your creditors. You may be allowed to settle your debt for less than the amount you owe, lower the interest rate, or come up with a new payment plan that you can afford.
6. Is Bankruptcy Your Last Resort?
When you’re drowning in debt, bankruptcy relief may seem like the easy way out. This is especially true if you have lost your job or you’re struggling to make ends meet every month. Many people make the hasty decision to file for Chapter 7 just to get instant relief from all the financial stress and avoid exhausting debt collectors.
It is very important, however, to look into the future after your bankruptcy. Will you be able to cover your expenses after your debts are discharged? Or will you still be out of pocket?
You should ask yourself this because there may be other options to cover your debt payments instead of a bankruptcy filing. For example, you can explore ways on how to make money on weekends or how to make money without a job.
When you file under Chapter 7, you cannot file again until after 8 years. So if your total debt is not that high, you might want to save that bankruptcy court filing for future use just in case you get into worse circumstances.
7. Can You Live With the Consequences of Bankruptcy for 7 to 10 Years?
Filing for bankruptcy has a major impact on your financial dealings. Chapter 13 bankruptcy stays in your credit report for 7 years while Chapter 7 stays for 10 years. While there may be ways to remove bankruptcy from your credit report early, the chances are minimal.
Your credit score is likely to drop between 100 and 200 points after bankruptcy. The higher your score, the higher the drop. A lower score means a higher interest on loans and new credit. If you’re looking for a new job or venturing into a new business, having a bankruptcy in your records could impact this process.
What Are the Requirements to Apply For Bankruptcy?
Although there’s no minimum debt required to file for bankruptcy, there are other requirements that you need to meet.
Requirements for Chapter 7:
- Your average monthly income in the past 6 months should be lower than the median income for similar families in your state. If not, you need to pass a means test to qualify.
- You haven’t filed for Chapter 7 Bankruptcy in the past 8 years.
- You haven’t filed for Chapter 13 in the past 6 years.
- You need to wait at least 181 days before you can refile for bankruptcy if you recently filed one and it wasn’t granted.
- You have to consult an individual or group credit counseling agency within 180 days before filing.
Requirements for Chapter 13:
- Your monthly income should meet the monthly debt payments in your bankruptcy plan.
- You must meet the limit for unsecured debt ($419,275) and secured debt ($1,257,850).
- You must wait 181 days if you’ve recently filed for bankruptcy but were not granted.
- You must offer proof that you’ve filed state and federal tax returns in the past 4 years.
- You have to consult an individual or group credit counseling agency within 180 days before filing.
Think Before You File
Before you file for bankruptcy, exhaust every possible option to pay for your debt obligations. Bankruptcy should be the last on your list of solutions. It’s not the easy way out as there are attached consequences when you file for bankruptcy. If you’re not sure what to do, consult a bankruptcy lawyer right away. A bankruptcy attorney can guide you through the process and help you make the right decision.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
