How much debt is worth filing for bankruptcy? (2024)

FAQs

Is $10,000 worth bankruptcy? ›

"Some have a 'rule of thumb' that suggests having at least $10,000 in dischargeable debt is enough to file for bankruptcy," says Brandon Robinson, president and founder of JBR Associates. But one-size-fits-all solutions in finance are rarely the best options.

If after deducting all standard and actual expenses you earn less than the state median income for a family of your size, you pass the means test. If you earn more than the state median income, you may still file Chapter 7 if more than 50% of your debt is business or nonconsumer debt.

I analyzed millions of filings and interviewed dozens of judges, lawyers and people struggling with debt. The answer turns out to be simple: People are too broke to go bankrupt. Filing costs money, as does hiring an attorney, which is the best way to make sure you actually get debt relief.

5 Reasons Your Bankruptcy Case Could Be Denied

The debtor failed to attend credit counseling. Their income, expenses, and debt would allow for a Chapter 13 filing. The debtor attempted to defraud creditors or the bankruptcy court. A previous debt was discharged within the past eight years under Chapter 7.

It might be time to declare bankruptcy, if, for example, you have large debts that you can't repay, are behind in your mortgage payments and are in danger of foreclosure, or are getting calls from bill collectors. Bankruptcy can often reduce or eliminate your debts, save your home, and keep bill collectors at bay.

Bankruptcy doesn't cover all debts so it's important to make sure you know whether any of your debts won't be covered and put plans in place to deal with them. You might need to: keep paying some debts while you're bankrupt. stop paying some debts, but start paying them again when your bankruptcy ends.

Creditors do not “get mad” in a personal sense, but they may be disappointed as bankruptcy means they may not receive the full repayment of debts owed. However, creditors understand bankruptcy is a legal process designed to provide relief to debtors in financial distress.

While you are allowed to spend money on essential items such as housing, utilities, food, and transportation, extravagant expenses might be scrutinized by the bankruptcy court. Be mindful of your spending habits and prioritize essential needs to avoid potential complications.

You should not spend any money or dispose of any assets you own when you file your Chapter 7 bankruptcy case. Without court approval, the Chapter 7 Trustee can force the recipient to return the money or property. However, the income you receive after filing your case is yours to use.

Chapter 7 bankruptcy is the cheapest way to file bankruptcy because there are ways to reduce or waive costs. If someone has no tangible assets, their filing fee and/or bankruptcy court fee waived.

Why shouldn't you file bankruptcy? ›

Bankruptcy is recorded on your credit reports and remains there for seven years from the filing date for Chapter 13, or 10 years from the filing date for Chapter 7. A bankruptcy on your credit reports has a deep, long-lasting negative impact on your credit scores.

Not only are the fees of Chapter 7 bankruptcy lower, but you also end up paying less to your creditors.

Among other reasons, the court may deny the debtor a discharge if it finds that the debtor: failed to keep or produce adequate books or financial records; failed to explain satisfactorily any loss of assets; committed a bankruptcy crime such as perjury; failed to obey a lawful order of the bankruptcy court; ...

What does life after bankruptcy look like? You'll have to endure hardships — from cash flow management to establishing good credit and rebuilding your credit profile — but it's possible to financially recover from bankruptcy and give yourself a fresh start.

Bankruptcy Pays for Itself

Filing for bankruptcy isn't completely free. So, oftentimes, bankruptcy pays for itself. Between petition fees, liquidation of assets, and for some, repayments plans, a portion of the debt owed is paid through the bankruptcy process alone.

Most attorneys won't accept a Chapter 7 bankruptcy client with less than $10,000 in dischargeable debt. Not only can $10,000 be difficult to repay, but anything less, and the court might question whether bankruptcy would be in the filer's best interests.

The truth is that bankruptcy can definitely tank people's credit scores. But in most cases, these people already have a bad credit score because of how much debt they have. In fact, the average credit score after a bankruptcy discharge can vary between 400 and 530.

Under Chapter 13, you also have the $550 cash exemption along with a wildcard exemption up to $1,475, allowing you to keep $2,025 in cash under Chapter 13. However, when filing for Chapter 13 bankruptcy, you can claim and exempt 75 percent of the wages you earned in the preceding 30 days.

You'll have to endure hardships — from cash flow management to establishing good credit and rebuilding your credit profile — but it's possible to financially recover from bankruptcy and give yourself a fresh start.