Filing for bankruptcy relief can be a confusing decision, especially if your debts are relatively low. Many people wonder if they have enough debt to file for bankruptcy.
Is $5,000 too little debt to file for bankruptcy? Is $25,000 too little debt to file for bankruptcy?
We will cover that and more in this article, but you may also want to consider reading 8 other potentially costly mistakes to avoid when considering bankruptcy.
The purpose of this article is to show you which debts are eligible for discharge in bankruptcy and to help you understand the cost to file bankruptcy.
1) READ FIRST: What is enough debt to file bankruptcy?
When people file for bankruptcy, a common question is what debts can be eliminated in bankruptcy and how much debt do I need to file bankruptcy. Here are common debts to consider:
- Unsecured debt (credit cards, medical debt, personal loans, etc.)
- Secured debt (automobile, home)
- IRS tax debt
- Student loans
One of the questions about the debt amount is whether you can afford the debt or not. If you are unable to afford the debt amount, you may want to consider debt relief or the debt payoff options calculator such as the one below to compare costs and fees and debt freedom dates to see whether there’s an option for you.
For example, if you have $5,000 in debt and can pay it back within 2 years with debt payoff planning, you may consider a different debt payoff option than if you have $500,000 in debt and will never be able to pay off your debt. The debt payoff options calculator compares Chapter 7, Chapter 13, Debt Settlement, Debt Management, and Debt Payoff Planning.
2) So, How Much Debt is Enough To File Bankruptcy?
There is not a specific amount of debt a person must have before the person files for bankruptcy relief. If you owe $5,000 in credit card debt, you could file for bankruptcy relief. However, merely having the right to file for bankruptcy relief does not mean that it is a good idea.
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. Therefore, filing Chapter 13 for $5,000 in debt may not be a good option.
On the other hand, if you meet the income qualifications for a Chapter 7 case, do not have many assets, and file bankruptcy without an attorney, you could get rid of your $5,000 in debt in about four to six months.
The problem with this scenario is that you would not qualify for another bankruptcy discharge under Chapter 7 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.
3) Income vs. Expenses vs. Debts
Before you decide to file for bankruptcy relief, you may want to take time to consider other options for getting out of debt. First, you want to consider how much you earn versus 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 you can change your financial situation.
Earn More Money
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 bankruptcy.
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.
Our Savvy Debt Payoff Planner automates your budget to help you find ways to reduce expenses to pay off debts quicker. With the debt payoff planner, you see real results that encourage you to continue working to pay off debts without filing bankruptcy.
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. However, the companies expect a lump sum payment to settle the debt. Also, the amount of debt “written off” or forgiven is likely to be included in your taxable income for that year, which could increase your tax liability.
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 will it take you to pay off your debts if you do not file for bankruptcy relief. 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 ten years to pay off the debt with an interest rate of 26 percent. You will pay almost $18,000 in interest for a $10,000 debt. That is assuming that your credit card company allows you to pay just $235 per month. The company may require a higher minimum payment each month.
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.
As with all other financial matters, it is essential to consider all factors relevant to your situation before deciding how to proceed. 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. We want you to have all information available about debt relief options so that you can choose the best option for you. Let’s get to work on a plan to help you get rid of debt quickly and affordably.