Shouldering debt from mortgages, loans, credit cards, and even home equity lines of credit can be difficult. In fact, of the $13.54 trillion in household debt owed by U.S. consumers at the end of 2018, nearly $320 billion in balances were 90 days or more past due, according to the Federal Reserve Bank of New York.
Bankruptcy should be considered a last resort that can have both short-term and long-term effects. But for some people, filing Chapter 7 or Chapter 13 might make sense.
With Chapter 7 bankruptcy, you could petition to have qualifying debt discharged. This is usually unsecured debt, such as medical bills or credit cards. A trustee then reviews your saleable assets, such as a home or car, and then sells them to pay back your creditors. The remaining debt is then discharged by the bankruptcy court.
In filing for Chapter 13 bankruptcy, the court develops a debt re-arrangement plan that can help you keep some of your property while repaying your debt over a number of years. At the end of a Chapter 13 bankruptcy, you may receive a discharge of debt associated with the case if specific criteria are met.
Since these are the two most common types of bankruptcy for which consumers may file, many people wonder how much debt they need to have to qualify for each chapter and if making this move is right for them.
In this guide, we’ll look at the financial requirements related to bankruptcy, when it might make sense to file, and how to get started.
How much debt do I need to file for bankruptcy?
There is no minimum amount of debt needed to file for bankruptcy, which can be good news, depending on your situation.
“Everybody’s circumstances are different, which is why it’s hard to say how much debt you need to file for bankruptcy,” says John C. Colwell, a San Diego-based attorney and President of the National Association of Consumer Bankruptcy Attorneys.
“For the wage earner who is living paycheck to paycheck and struggling to make rent, sometimes it makes sense to do the Chapter 7 to wipe the slate clean,” he says. “There might also be circumstances when filing a Chapter 13 to reorganize debt makes more sense.”
When it makes sense to file for bankruptcy
Colwell says your individual situation and the amount of financial stress you have is a key indicator of whether filing for bankruptcy is in your best interest.
“There are certain trigger points that indicate that you’d better slow down and start asking questions,” says Colwell. “These include taking out regular payday and title loans against your car, making 0% balance transfers on credit cards and only making minimum payments, or even thinking about liquidating or taking loans against retirement funds.”
You're considering a risky move in order to keep up with payments
Take, for example, a man who has $100,000 in credit card debt and $75,000 in a retirement account and has struggled to make his minimum payments each month. He earns only $25,000 a year and is considering liquidating his 401(k) to pay off some of this debt.
Instead of risking his retirement savings, the man may want to look into filing Chapter 7 bankruptcy. Most types of retirement income are not eligible for liquidation under Chapter 7, so he may be able to keep his retirement money and get out of debt by having the credit card debt discharged.
Stress is taking a big toll on your life
Colwell also recommends looking at the amount of stress your debts are causing in your life. If worrying about how to pay off debt is impacting your health and personal relationships, it may be time to think about filing for bankruptcy.
For instance, let’s say a married couple is three months past due on payments of their $350,000 mortgage and facing foreclosure on their home. They are also late on their car payments, and repossession of their vehicles would prevent them from getting back and forth to their full-time jobs. As a result, they are constantly stressed, fighting, and have even talked about divorce.
In this case, thinking about filing Chapter 13 bankruptcy may be a good idea for this couple as a way to catch up on payments and reduce the stress on their relationship.
A fresh start is worth the hit on your credit
Another consideration is whether you can withstand the impact on your credit score. According to Colwell, most of the people he sees file for bankruptcy already have low credit scores, and the discharging of their debt can actually give them a boost.
That boost does come at a cost, however, as Chapter 7 bankruptcy stays on your credit report for 10 years. With Chapter 13, the bankruptcy stays on your credit report for 7 years. Also, it’s difficult to borrow for the length of time you’re in the case, which can be from three to five years.
Though you can spend years building up your credit score, having a bankruptcy on your record can impact borrowing in the future. You may be subject to higher interest rates, approved for smaller amounts of money, or even rejected for loans or credit.
Think about a woman who rents an apartment and has a medical emergency resulting in $250,000 in hospital bills she can’t pay on a $55,000 annual salary. She has few assets of great value and has a fair-to-good credit score. Getting a clean slate by filing for Chapter 7 may be a good option for her to consider.
She has a few assets that could be liquidated to pay the debt, which may allow her to have her debt completely discharged. Over time, the bankruptcy should have a minimal negative impact on her long-term ability to borrow money.
Am I eligible for Chapter 7 or Chapter 13 bankruptcy?
There are some basic eligibility requirements for both Chapter 7 and Chapter 13 filing, according to the United States Courts.
For instance, if your current monthly income is more than the state median, a means test will be applied to determine if your claim is legitimate under the law.
You also can’t file if, within 180 days before filing, you voluntarily dismissed a previous case. This may happen if a lienholder approaches the court to recover their property from you to satisfy your debt.
For most people, however, the question isn’t so much of being eligible but whether this is the right choice for your situation.
Chapter 7 eligibility
Individuals, partnerships, corporations, and other businesses are eligible to file for Chapter 7 bankruptcy. Also known as liquidation bankruptcy, it is best used for unsecured debt, such as credit card debt, medical, payday loans, etc.
When you file, a trustee takes over your non-exempt assets, which are then evaluated and sold to pay your creditors. The remainder of what you owe is then discharged — basically forgiven — within three to four months. Discharges only apply to individual bankruptcy cases, not to those filed for a business, partnership, or corporation.
Under Chapter 7, you may be able to keep some of your property, depending on the laws of the state in which you file and how much you owe. Each state has its own laws regarding what qualifies as exempt property.
Chapter 13 eligibility
Though there is no minimum amount of debt to file Chapter 13 bankruptcy, there is a limit to the amount of debt you can have. According to the United States Courts, you are not eligible for Chapter 13 bankruptcy if you have unsecured debt of more than $394,725 and secured debt of more than $1,184,200.
Chapter 13 is also called the wage-earner plan because it reorganizes debt for repayment. This may be a good option if you’re facing foreclosure, repossession, or even some types of wage garnishment, which could include unpaid taxes. You may be able to keep assets that would otherwise be sold off under a Chapter 7 filing.
“Chapter 13 can be good for gaining some control over uncontrollable debt, assuming you have the income to pay under the new arrangement,” says Colwell. “Almost all creditors have to stop their collection action once a bankruptcy petition is filed and look to the court and code for how to proceed.
“The debtor proposes a plan of reorganization. That plan can provide to cure or catch-up on arrears on a house, rewrite or re-amortize a car loan, force the IRS into a payment plan, as well as compromise payments to other unsecured creditors. If the plan is confirmed, the debtor pays according to the plan and the property (house, car, etc.) is protected.”
Reduced interest rates or amounts owed and a formalized payment plan can be negotiated as part of a Chapter 13 bankruptcy. However, a discharge is not issued until the bankruptcy case is completed, which can take three to five years.
How much it costs to file bankruptcy
Filing for bankruptcy is not cheap. Simple filing fees range from $310 to $335, depending on which chapter you file.
In addition to filing your case, you also have to provide copies of your tax returns. Federal bankruptcy law also requires you to complete debtor education courses before and after filing, which also have fees associated with them.
Meeting all these requirements can run between $400 and $500 on average.
If you choose to involve a bankruptcy attorney in your case, additional fees apply. Colwell estimates that filing for Chapter 7 with an attorney can range from $1,500 to $2,500, though attorney fees can vary greatly across the U.S. Because Chapter 13 cases go on for three to five years, it’s not unreasonable to estimate it could double the cost.
Many attorneys will perform a consultation for free and then charge a flat project fee plus filing expenses. Some may opt to bill hourly, which may be much more expensive in the long run.
Where to start if you're thinking of filing
Researching bankruptcy options and learning as much as you can about the process of filing is a good first step. Because most bankruptcy attorneys provide free consultations, making an appointment and asking questions is a low-risk way to gather information.
Consumers should be careful about evaluating the information on bankruptcy, Colwell warns. He recommends researching attorneys through State Bar Associations and the Better Business Bureau, searching for a National Association of Consumer Bankruptcy Attorneys member attorney, and asking friends and family about their experiences.
Don't delay. Many people delay looking into their financial options, which can prolong stress and increase the amount of debt owed. Colwell recommends seeking relief and speaking with a debt counselor or bankruptcy attorney as soon as possible, as the weight of carrying debt is not worth the impact it might have on your personal life.
“The stress of getting up-to-date with payments, the prospect of losing property, and getting daily calls from creditors is very real,” he says. “The only real way to get answers is to ask.”