Nobody wants to have too much debt. A few hundred dollars is OK. A couple thousand dollars might be doable. But once debt hits $10,000, people start to panic. How will they ever pay back that much money?
That much debt can be overwhelming. You may wonder: should I file for bankruptcy? There is no straight answer, as this will depend on your situation.
Bankruptcy laws do not specify a minimum amount of debt that a person needs in order to file for bankruptcy. You can file whether you have $1,000 or $100,000 of debt. However, bankruptcy may not always be the best option depending on your individual circumstances.
When determining whether to file you must consider these factors:
- Your ability to repay your debts outside of bankruptcy.
- The types of debts you owe (secured, unsecured, medical bills, student loans, etc) and whether they can be discharged in bankruptcy.
The amount of your debt will likely be a factor in when you file.
What Chapter Should I File?
With Chapter 7, most debts will get wiped out, and no payment plan is required. However, this part is not necessarily easy. Chapter 7 is also known as liquidation bankruptcy because you may have to sell some of your assets to repay debts. Once this is done, you will likely be relieved of your debts completely. Chapter 7 is good for those who have a lot of unsecured debt (credit cards, medical bills, etc.) Chapter 7 is not a good option for those who are facing foreclosure or repossession and want to keep their assets. It also cannot wipe out student loans, tax debts, or child support.
With Chapter 13 bankruptcy, your debts are not wiped out. Instead, you make payments and hold onto your property by working on a payment plan that lasts three to five years. Chapter 13 bankruptcy allows you to catch up on missed payments overtime and keep property associated with secured debt.
The Effect on Your Credit
It costs money to file. It costs money to hire a lawyer. On top of that, bankruptcy can affect your credit for a decade. It can make it difficult to get a loan, a car, or a new home during the period your credit is affected.
Alternative Options
So, while anyone can file for bankruptcy, you have to assess whether or not it will be able to solve your problem. Many bankruptcy lawyers advise against filing for bankruptcy if there are other options you can explore first like obtaining a consolidation loan. Therefore, bankruptcy should be reserved as a last resort, so you may want to consider other options first.
Also, bankruptcy needs to be done in good faith. If the court feels you filed simply to avoid paying the debt, you may be barred from filing for bankruptcy in the future.
As a general rule, if the amount of debt you are facing can be paid off in the next six months in some realistic way, then bankruptcy is probably not the best tool. However, if you think you will be in the same position in six months, or maybe even worse off, then bankruptcy might be able to solve the problem.
First, try some options to resolve your debt. Consider a debt consolidation loan, which can help you manage multiple debts into one easy payment. Just make sure to get a lower interest rate than what you are currently paying and get a handle on your spending habits.
You can also try the debt snowball strategy, which involves paying off your smallest debt first and then applying the money you used toward that paid-off debt to attack the next-smallest debt. You do this until all your debts are paid off.
A similar strategy is debt avalanche. This involves paying the debt with the highest interest first and working down from there. This method will get you out of debt quicker while saving more money.
No Minimum Debt Requirement
There are no clear-cut guidelines when it comes to filing for bankruptcy. There are no minimum debt requirements, so think about your situation thoroughly.
A good bankruptcy lawyer can advise you if filing for bankruptcy is in your best interest.
