If you’re wondering if there is a minimum amount of debt required by the bankruptcy code to declare Chapter 7 bankruptcy, today we are going to crack the code and help you decide if filing for bankruptcy is the right thing to do for you and your family.
Demystifying Debt Limits for Bankruptcy Filings
If you currently carry a lot of consumer debt spread across several credit cards, you’ve certainly seen the “minimum payment warning” on the first page of your monthly statement.
It can feel overwhelming that making the minimum payment means carrying a debt for five, seven, or even eleven years.
And that’s if you don’t charge another thing on the credit card!
The accruing interest on your balances quickly consumes the minimum payment you’re making — throwing you into a seemingly never-ending cycle of debt. Your cash is going out but your debt isn’t going down.
But, still, you may ask yourself, “do I really have enough debt to make declaring bankruptcy worth it?”
Key Factors That Indicate Chapter 7 Bankruptcy Might Be Right for You
Because everyone’s financial situation is unique, each bankruptcy petition is unique too.
But there are six key considerations that could indicate that bankruptcy is the right decision to get you out of debt faster and on the road to a brighter financial future.
- Are you able to repay your debts outside of bankruptcy? If you can pay your debts but you’re choosing not to — you aren’t really a candidate for bankruptcy. The trustee assigned to your case by the bankruptcy court will review your entire financial situation and use that information to decide whether you can repay your debts to your creditors.
On the other hand, if you are making a good faith effort to pay your debts each month but still find yourself having to make hard decisions about what bills get paid and when, bankruptcy could be the right choice for you.
- What’s your debt-to-income ratio? Realistically, it isn’t the total amount of debt you carry as much as it your available cash flow each month. If you have negative or near negative cash flow once your bills are paid, your monthly budget will get a much-needed bump from the forgiveness of qualifying debts in a bankruptcy proceeding.
Don’t fall victim to the idea that there’s a one-size-fits-all calculation for sufficient debt to warrant giving strong consideration to filing for bankruptcy. If you’re struggling it’s worth it to have an attorney review your situation and give you strategies and possible solutions.
If you’re on a fixed income, even small amounts of debt can cause a financial hardship that can be corrected through bankruptcy.
- Are your creditors willing to work with you to create realistic payment plans? A realistic plan is one that actually pays down your debt while allowing you enough flexibility to pay your other creditors and still have access to some disposable income.
Don’t let unscrupulous creditors bully you into predatory payment plans that diminish your ability to pay your other bills or that cause you to dip into savings or retirement funds to make your payments.
- Can you repay your current debts in a reasonable amount of time? Depending on your personal circumstances a bankruptcy may remain on your credit for 7-10 years after your debts are discharged. Will it take you longer to pay your current obligations? If the answer is yes, you may be able to improve your financial situation sooner by going bankrupt and making smart decisions to rebuild your credit.
As a condition of most bankruptcy proceedings, petitioners are required to take mandatory credit counseling and financial literacy classes. Most people find these courses helpful to building a healthy financial future.
- Is your debt increasing just to make ends meet? If you’re not able to purchase necessities from your paycheck and you’re using credit cards, payday, or personal loans to get the things you need each month, declaring bankruptcy can get you the fresh start you need to set yourself up for future financial success.
Minimum payments and mounting interest rates will keep you and your family stuck in debt and struggling every month. Eventually your credit lines will be maxed out and you’ll be left with no options. It’s important to have a plan before things get to this point.
- Are your primary debts dischargeable under the bankruptcy code? Most consumer debt — like credit card bills and medical bills — can be forgiven in a Chapter 7 bankruptcy. Other common debts, like alimony, child support, student loans, and recent tax debts don’t go away when you declare bankruptcy.
It’s important to review your situation with a local bankruptcy specialist who will analyze your current debts versus cash flow and then determine the best course of action for you, your family, and your financial situation.
Because the decision to declare bankruptcy isn’t one that should be taken lightly, you’ll want to have a complete understanding of your debts to determine if your debt meets the viable threshold to petition the bankruptcy court for protection from your creditors.
How Do You Calculate the Minimum Amount of Debt to Make Filing for Bankruptcy “Worth It”?
The first — and best — step to take when trying to determine if you have sufficient debt to make it “worth it” to file for bankruptcy is to schedule a free consultation with a qualified, local bankruptcy attorney.
It’s critical to get the right legal advice from the start. Too many times, people prolong the agony of struggling with their bills or take actions based on the advice of well-intentioned but ill-informed family members or friends.
Some people even take “advice” from their creditors! This is the type of advice that can make a bad situation even worse.
You deserve straight answers from a professional who will handle your case from consultation to conclusion and guide you through the right steps, so you come out of your bankruptcy with a clear strategy to secure a better financial future.
When you schedule a free consultation, expect to review your types of debt.
- Secured debts: These debts are “secured” by collateral – usually your house or car. If you want to keep these assets — and most people can and do — you and your attorney will discuss how to reaffirm those debts and get you caught up on missed payments.
- Unsecured debts: These are debts that aren’t guaranteed by a tangible asset. Usually your credit card debt, medical bills, and utilities fall into this category.
Once you file for bankruptcy, the bankruptcy court clerk will notify your creditors that you’ve filed for bankruptcy. The act of filing your petition means that all collection efforts must stop while your case is open and active.
Just getting this automatic stay from all the collection calls and notices can help you sleep better at night.
Thinking about the potential future savings on your debt service will make you realize the upside of paying these out-of-pocket costs now.
Are You Ready to Discuss Bankruptcy with a Local Bankruptcy Specialist?
When you get down to it, there’s no minimum amount of debt required to declare bankruptcy. While some chapters do have upper limits for secured and unsecured debt, most individuals prefer to file for Chapter 7 bankruptcy if it’s an option.
If debt has overtaken your life, filing for Chapter 7 bankruptcy can allow you to retake control. However, bankruptcy is not the right call for everyone. It is sometimes possible to settle with creditors out of court. A good bankruptcy attorney will review your financial situation and your current debts and will never push you to declare bankruptcy if there are other viable options.
You are eligible for Chapter 7 bankruptcy if you file as an individual, a sole proprietor, a partnership, a corporation, or other business entity. However, if you are a business owner and you would prefer not to close your business and liquidate assets, you should consider Chapter 11 bankruptcy. Sole proprietors may also qualify for Chapter 13 bankruptcy, which gives the debtor the opportunity to create a payment plan and settle their debts.
If your monthly income is greater than the California state median, you will have to pass a “means test” to determine eligibility to file under the rules set out for Chapter 7.
If you qualify to file Chapter 7, technically the trustee can liquidate your assets to satisfy creditors. But almost 95% of all filers can keep their house, car, and retirement savings by strategically using exemptions for certain types of personal property and assets.
And most people will complete the bankruptcy process in as little as six months.
The type of debt you are carrying and the amount of that debt may create a situation where it makes sense to declare bankruptcy.
If you feel like you are out of options to pay your debts or your creditors are taking actions against you such as wage garnishments, you may be in a situation where the short-term discomfort of a bankruptcy filing can get you to the other side sooner. Don’t risk digging yourself deeper into debt or spending savings that could be protected from creditors.
You want a Certified Bankruptcy Specialist on your side. A highly qualified attorney who understands your unique situation and how the state and federal laws will impact your options — and one who will handle your case personally rather than handing you off to a parade of paralegals.
The best time to talk to a local bankruptcy attorney is now. Schedule a free bankruptcy strategy session in either our Riverside or Mission Hills offices.
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