How Much Debt Makes It Worth Filing for Bankruptcy?

How Much Debt Makes It Worth Filing for Bankruptcy?
Most people in the U.S. have some degree of debt. While debt is manageable for some, it’s not so manageable for others.

Most people in the U.S. have some degree of debt. While debt is manageable for some, it’s not so manageable for others. Those who feel no hope in paying back their debts usually consider bankruptcy, but only as a last resort.

While bankruptcy is certainly an option for many entrepreneurs, it may not be the best choice depending on your debt size. For example, someone who is $300,000 in debt is an obvious candidate for bankruptcy, while someone $7,000 in debt might not benefit much because of the filing fees.

There’s no specific threshold for how much debt you need to file for bankruptcy. Whether or not you should file depends entirely on your personal situation, including your income, your debt, and your ability to pay back your debt (or not).

Are you willing to obtain legal counsel?

The first question to ask yourself is if you’re willing to obtain legal counsel for your bankruptcy case. The court system is unforgiving to those who choose self-representation and it’s not worth risking a poor outcome.

First and foremost, in order to file for bankruptcy, you need an attorney. Whether you’re filing under Chapter 7 or 13, a bankruptcy attorney will help you get the best outcome. For instance, if you proceed without a lawyer, you might not know how to convince a court you qualify for getting a blank slate under Chapter 7.

Inexperience in the courtroom could end with the court only approving you for Chapter 13, where you’ll need to pay back all of your debt on a pre-set payment schedule over several years.

There’s nothing wrong with paying back your debt incrementally when you can truly afford to make the payments, but you might need to seriously restructure your life to make it work; that’s why you need a bankruptcy attorney.

Are you a good candidate for bankruptcy?

There are many types of bankruptcy, but most people are familiar with Chapter 7 and Chapter 13. Chapter 7 is where your debts are eliminated completely, while Chapter 13 requires paying your debts over three to five years with income-based payments. Everyone wants to qualify for Chapter 7, but not everyone does.

It’s impossible to say whether anyone should or should not file for bankruptcy. It’s not a yes or no question. While you’ll need to consult an attorney for a definitive answer, you’re a good candidate for bankruptcy if you meet the following conditions:

  • You have unsecured debt you can’t pay back.
  • You’re getting sued by creditors for money you don’t have.
  • Your house is in danger of foreclosure.
  • You’re living off of your credit cards.
  • You’ve thought about withdrawing money from your 401(k) to pay your bills.
  • There is no other way to reduce or eliminate your debt with your creditor.
  • Other debt relief programs haven’t worked, or you don’t want to go through additional processes.
  • Credit counseling didn’t work and you need a faster solution.
  • You’re afraid of getting swindled by a debt consolidation scam.
  • You’re willing to work out a payment plan if necessary.
  • You don’t mind having bad credit for the next seven years.
  • You’re not afraid of the social stigma surrounding bankruptcy.

This list isn’t exhaustive, and you’ll need to consult with a lawyer to know for sure if your particular situation qualifies and what assets you might need to sell if you’re a candidate for Chapter 13.

Are you willing to sell your assets?

The next consideration is whether you are willing to sell your assets (if you have any). If you have assets that can cover your debt, you probably won’t qualify for Chapter 7. Instead, you’ll likely be approved for Chapter 13, provided you agree to sell certain assets to cover your debt.

There is no shame in filing for bankruptcy.

Most people end up considering bankruptcy at some point in their life and there’s no shame in needing help to get out of debt. Although, personal bankruptcy rates are going down

Bankruptcy filings in the United States have been dropping in recent years. Personal filings dropped by nearly 30% in 2020 and dropped again by 38% in 2021.

As of March 2021, there were 453,438 personal bankruptcies filed in the previous 12 months, which is a drastic decline from 2017 when personal filings were up to 770,901.

Whether you choose to file or not, start budgeting and downsize your life wherever possible. It can be hard to maintain a lower standard of living after you’ve lived a different way for so long, but it’s the best way to ensure you never have to consider bankruptcy again.

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