How Much Is Enough (To File Bankruptcy)?

I am commonly asked what is the minimum amount of debt to file a bankruptcy. Technically, there is no "minimum". The Bankruptcy Code does not require a minimum amount of debt before filing (though there is a maximum amount in Chapter 13 that rarely applies). In practice, the amount where bankruptcy becomes worthwhile is determined by the circumstances of the case. It is different for each individual, and it is worth some time to examine.

First off, the filing fees and costs (for classes and credit reports) are normally in the neighborhood of $400. So, right off the bat, it's not going to make sense to file for less than that. Not that many people are asking to file a bankruptcy on a $300 credit card. But, it is worth remembering this is the base-line cost. With legal fees added, the amount of debt necessary to make bankruptcy make sense is a bit higher. Normally at least several thousand dollars.

I usually do not recommend filing bankruptcy for less than $5,000, though that is really just an arbitrary number. If there is a creditor lawsuit, and my client has no other way of paying the underlying debt, it could be worth filing on less. Lawsuit judgments are extremely damaging to credit, and they potentially threaten your interest in your home, car, and bank accounts. Bankruptcy can also stop wage garnishments, which can be highly destructive to those on a tight budget, even if the amount owed is modest. If bankruptcy is the only way out, the amount owed isn't of much significance. A debt of only several thousand dollars could result in you losing your car or savings, believe it or not.

If your income is very low, as is the case for individuals on Social Security, filing on less debt can make sense. $4,000 or $5,000 can be a huge burden if you only bring home $800 or $900 per month. I will reduce legal fees in these cases as much as possible, though there will still be filing fees in the range of $400. Once again, the circumstances are much different if you are making $50,000 a year.

Foreclosures and repossessions change the situation. Chapter 13 bankruptcies can be used to stop foreclosure, reorganize the debt, and keep your home. If you need to stop a sheriff sale, the underlying amount is not important. The sheriff sale needs to be stopped regardless. If you don't have all the money to catch up on the missed payments, interest, and fees, bankruptcy might be the only option. The same applies to retrieving a vehicle that has been repossessed. If you need the car, you will need to file, even if the amount owed is minimal.

Bankruptcy sometimes does not make sense when you owe more than $5,000, or even significantly more. If your income is very high, or you have large amounts in savings, paying the money back directly to the creditor may be cheaper and simpler. If you want to get a mortgage in the next few years, you may also want to avoid bankruptcy if possible. While getting credit cards and car loans are fairly easy coming out of bankruptcy, mortgage standards have tightened. If you owe a large amount of money on credit cards, getting a mortgage is unlikely, and you should probably file anyways, to start rebuilding your credit. But, if the amount you owe is modest, avoid bankruptcy is something to consider.

I am happy to meet and discuss if your debts are significant enough to file bankruptcy. I frequently negotiate with creditors to reduce the amount owed and avoid bankruptcy. If this is not possible, I will look at things on a case-by-case basis. Contact us to schedule a free consultation.