There's no minimum amount of debt required to file Chapter 7, but that doesn't mean you should. A question I frequently hear is: "Do I even have enough debt to justify bankruptcy?" Is $5,000 too little debt to file for bankruptcy? Should you file for bankruptcy for $20,000 in debt?
In this article, I will break down which debts can actually be discharged and help you think through whether the cost of filing makes sense for your situation based on the
cost to file for bankruptcy and other factors.
1) What Type of Debt Is Forgiven In Bankruptcy?
When someone is considering bankruptcy, the first thing they usually want to know is: what exactly gets wiped out?
Here are some of the most common debts that can be discharged:
- Unsecured credit card debt
- Medical debt
- Unsecured personal loans
- Automobile deficiency
On the other side, here are some debts that are usually not able to be discharged:
- Secured debt (automobile, home)
- IRS tax debt
- Student loans
While unsecured credit card debt may be discharged (forgiven), other debts, such as your mortgage, may not be forgiven.
Now let's talk about what it actually costs. Because that is usually where the real decision happens.
2) Take A Free "Should You File For Bankruptcy" Quiz
Because so many people were unsure whether bankruptcy made sense for them, we created a
free "Should You File For Bankruptcy?" quiz to help you estimate costs and compare alternatives.
You can find the quiz below (no email required) to estimate the cost, qualifications, pros and cons of bankruptcy, and the costs and duration of bankruptcy alternatives. While the quiz will not tell you whether you should file (as we do not provide legal advice), it can hopefully help clarify your options to help you make the most informed decision.
2) So, How Much Debt is Worth To File Bankruptcy?
There isn't a magic number at which bankruptcy suddenly becomes "worth it." If you owe $5,000 in credit card debt, you could file for bankruptcy relief. Just because you can file doesn't mean it is the right move.
For example, if you earn too much income to meet the income requirements for a Chapter 7 case, you will
file under Chapter 13. Chapter 13 is a bankruptcy repayment plan. If you retain an attorney, you may pay as much as $3,500 in filing fees and attorneys’ fees. Also, you must pay administrative fees in Chapter 13 and cannot incur debt or sell property while in the Chapter 13 repayment plan. So filing Chapter 13 for $5,000 probably does not make financial sense.
On the other hand, if you meet the
income qualifications for a Chapter 7 case, don't own many assets, and file bankruptcy without an attorney, you could get rid of your $5,000 in debt in about four to six months.
One major downside is that you can't receive another Chapter 7 discharge for eight years. If you lose your job, become disabled, or face another financial crisis within eight years, you would not be eligible for debt forgiveness under Chapter 7 if you needed it. You are also
filing bankruptcy without an attorney, which means if you make a mistake, you could lose property or have your case dismissed without a discharge.
Should You File Bankruptcy for $20,000 in Debt?
If you
use the bankruptcy cost calculator and the cost in your area is around $1,000, including the $313 Chapter 7 filing fee, you are looking at a payment of $ 1,313 all in to discharge $20,000 in unsecured debt.
As stated above, we are assuming these are unsecured debts in this scenario (often credit cards, medical debt, personal loans, etc.). From a numbers standpoint, paying around 6-7% to eliminate $20,000 might seem like a great deal.
But before you jump to that conclusion, here are a few things I'd like to think through:
- If you wipe out the $20,000, are you actually out of the financial hole? Or are you just buying time?
- With Chapter 7, you may be able to file and receive a discharge only once every 8 years, so you may want to ensure that you have a financial plan that can help you. For example, if you have medical bills, do you have better insurance that will cover those bills?
- Do you want to buy a house in the next few years? There may be certain restrictions to consider.
- What financial stress are you facing? You may be facing the extreme stress of a wage garnishment rather than your accounts simply going past due.
So, while Chapter 7 bankruptcy may be the cheapest debt option, you may want to look ahead to see whether it's worth it for you specifically to file bankruptcy for $20,000 of debt.
Let's talk about income vs expenses vs debts.
3) Income vs. Expenses vs. Debts
Before you decide to file for bankruptcy for relief, you may want to take the time to consider other options for getting out of debt. First, consider how much you earn, your expenses, and your debts. Is your income sufficient to pay your ordinary living expenses with enough money left over to pay your debts? If not, you need to look for ways to improve your financial situation.
Earn More Money
Before filing, it's worth asking whether there is a realistic way to increase income, even if only temporarily. Can you earn more income to help pay down your debts? Would your employer allow you to work overtime? Could you get a second job to earn additional income? Do you have a hobby that you could turn into a business, such as woodworking, sewing, or painting?
Depending on the amount of debt that you owe, increasing your income for six months to a year may help you pay off your debt without filing for bankruptcy.
Reduce Expenses
At the same time, you are working to increase your income, you also need to review your budget to determine if you can reduce expenses. Sometimes, reducing expenses is sufficient to help you pay off debt without worrying about increasing income.
Debt Settlement
Along with managing your finances and working within a budget to pay off debts, you may also want to consider
debt settlement. Your creditors may be willing to negotiate a lower payoff to settle your debt. Most creditors will want a lump sum to settle. One thing to note is that forgiven debt can sometimes be treated as taxable income.
Some individuals work with their creditors one-on-one to settle debts. However, there are also debt settlement companies that handle negotiations for individuals for a fee.
4) How Long Will It Take to Pay Off Your Debts?
Another factor to consider is how long it will take you to pay off your debts if you don't consider bankruptcy as a relief option. For someone on a fixed budget who cannot reduce expenses or increase income, paying off $5,000 or $10,000 in debt may take three to four times as long compared to someone who can increase income and reduce expenses.
For example, if you owe $10,000 in credit card debt and can only afford to pay $235 per month, it will take you 10 years to pay it off at an interest rate of 26%. You will pay almost $18,000 in interest for a $10,000 debt. And that's assuming your credit card company even lets you stay at that payment. The company may require a higher minimum monthly payment.
Therefore, if your resources are limited, filing bankruptcy for a smaller amount of debt may be more practical for you than it would be for someone in a different financial position.
At the end of the day, your situation is unique. You should not base your choices for debt relief on another person’s choice for resolving debt problems. What works for your friend may not work best for you.
Which should You Do?
Are you confused? Do you need help? Ascend provides resources, tools, and information to help individuals get out of debt. We can help you if you are interested in filing for bankruptcy. Ascend can also help if you want to explore
debt settlement or debt management options.
Our goal is to give you clear information so you can make the best decision for your situation. If you're ready to explore your options, we're here to help.
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