How Much Debt Do You Need to File for Bankruptcy?

A lot of people ask the same question when they’re thinking about filing for bankruptcy. The debt is piling up, and they’re feeling increasing pressure because of it. It may not be that huge of an amount, but their ability to pay it back is becoming more and more unlikely.

So they ask themselves if they’re in enough to debt to justify a bankruptcy.

How much debt do you need to file for bankruptcy, anyway? Is there an actual amount?

The answer is actually very simple, but there are some nuances: Bankruptcy laws do not require debtors to have a minimum debt amount in order to file for bankruptcy. When to file bankruptcy and determining if it is the right choice for you ultimately depends on your individual circumstances.

In this post, we’ll cover these circumstances in greater detail and give you a better idea of whether the sum of your debt and the pressure of your circumstances indicate that you should file for bankruptcy.

Indicators of When to File Bankruptcy

While there is no minimum debt to file bankruptcy, the amount of debt is certainly a vital thing to consider when filing.

However, there are other indicators or factors that dictate on when you should file for bankruptcy and these include:

  • Your ability to repay your debts outside of bankruptcy
  • Your creditors’ willingness to work with you
  • Your ability to discharge the types of debts that you have
  • Other circumstances of your individual case

On the other hand, there is a maximum debt limit that you need to know especially if you are filing a Chapter 13 bankruptcy. You cannot have more than $394,725 of unsecured debt and $1,184,200 of secured debt (for 2018) if you want to file for this type of bankruptcy.

Will Filing for Bankruptcy Help Eliminate Your Debts?

The big question is: Will bankruptcy eliminate all your debts? It is important to understand that there are different forms of debts and, under law, there are specific types of debts that cannot be discharged through bankruptcy.

These nondischargeable debts include some tax debts, domestic support obligations such as child support and alimony, debts incurred through fraudulent acts, debts arising from criminal behavior, like drunk driving, and student loans.

Factors That Will Help You Decide When You Should File For Bankruptcy

When to file bankruptcy is one of the most important decisions that you have to make in your financial life. Remember, when you should file for bankruptcy largely depends on your circumstances aside from the types of debt that you have incurred.

Below is a discussion of the factors to consider when filing for bankruptcy:

  • Unsecured debts: If you mostly have unsecured debts, then you can file for bankruptcy. It does not matter how much as there is no minimum amount of debt needed to file. Examples of unsecured debts include credit card debt, cash advance (payday) loans, and medical bills.
  • Secured debts:  If you are behind on a house or car payment, this may be a very good time to file for bankruptcy.  You will be able to keep your property and you will have 3-5 years to make up the back payments, often at a greatly reduced interest rate.
  • Employment situation: Being unemployed and having trouble keeping up with your payments can make you eligible to file for bankruptcy so that you can discharge some of your unsecured debts. By doing so, you can stay current with your secured debts or catch up on those payments via a Chapter 13 bankruptcy.  Likewise, if you are employed but still unable to meet your debt obligations, filing for either Chapter 7 or Chapter 13 can help you retain your assets (house and car) and free up cash to pay for them by eliminating or reducing payments on credit cards, medical bills and other unsecured debts.
  • Paying for bankruptcy court costs: To qualify for a debt discharge, you will need to pay for the court costs such as the filing fee, attorney fees, and education courses. Remember that none of these fees will be wiped out after filing for bankruptcy. However, the amount of these fees is minimal in relation to the monies saved on future debt payments which continue to mount with interest and late charges.

There are times when no matter how much debt you have, it is still worthwhile to consider bankruptcy, especially if there is no way for you to pay your debts and that your creditors are taking actions against you. These actions can be going to court, garnishing your wages, or trying to repossess your properties.

When To File Chapter 7 Bankruptcy and 13 Bankruptcy

Bankruptcy is a viable option for you no matter how high or low your debts are. Although the bankruptcy court does not have an outline regarding the minimum debt threshold, there are certain requirements that you need to meet in order to qualify.

  • Filing history requirements: If you have filed and been discharged from a bankruptcy in the past, you may not be eligible to file for another bankruptcy discharge until a certain amount time has elapsed. The number of years depends on the type of bankruptcy you chose or the circumstances of your previous dismissal.
  • Income requirements: To qualify for Chapter 7 bankruptcy, you need to pass the Chapter 7 Means Test wherein your income will be compared to the income of other families of your size within your state. This test allows the bankruptcy court to determine whether you have the capacity to pay off your debts.
  • Other acceptable debt requirements: It is important to note that only certain types of debts can be discharged under this type of bankruptcy. Unsecured debts such as payday loans and credit card debts can be discharged in bankruptcy.  You can also discharge the debts from a car or home that you don’t wish to keep if you are “underwater”. If you are behind on either a mortgage or car loan, then you can catch up on those payments via a Chapter 13 bankruptcy.

If you do not qualify for any of the Chapter 7 requirements, you can opt for a Chapter 13 bankruptcy, which will still allow you to discharge some or all of your unsecured debt and, at the same time, receive protection from the court and keep your assets.  

So, even if there is no way to discharge your nondischargeable debts, you can pay them off with this type of bankruptcy by discharging other debt to free up cash and creating a manageable, court protected repayment plan for nondischargeable debts.

Can You Still Pay Off Your Debts Outside Bankruptcy?

For most people, paying the minimum payments on unsecured and other debts is not a viable option if the goal is to be debt free in 5 years.  With a chapter 7 bankruptcy, all of your unsecured debt will be discharged in 3-6 months, while a Chapter 13 will have you debt free in 3-5 years, at a fraction of the cost of paying off your full debt plus interest.  

If you still have sufficient income, then you might be able to pay off your debts without resorting to bankruptcy but it will be at a much higher price. While filing for bankruptcy can affect your credit score, non-payment, late payments and a high debt load are more damaging to your credit.  

Many people look at bankruptcy as “ripping off the band-aid” of debt and taking a small amount of pain now for faster relief and benefit.

In order to file for bankruptcy, it is crucial that you approach a lawyer who specializes in bankruptcy law. Here at Leinart Law Firm, we can customize the best solution to your problem.

Although there is no minimum debt when filing for bankruptcy, we can help review your case and give you the best advice on which chapter of bankruptcy would most benefit you.

That way, you can set your finances straight and not dig yourself deeper in debt. So, if you are thinking of when to file bankruptcy, talk to an attorney first before making any decisions.

Schedule a FREE, no-obligation consultation and evaluation today.