The purpose of this article is to show you which debts are eligible for discharge in bankruptcy and to help you understand the cost of file bankruptcy.
Keep on reading, or jump ahead to the section that interests you most.
1) What Type of Debt Is Forgiven in Bankruptcy?
When people file for bankruptcy, a common question that’s often asked is “What debts can be eliminated in bankruptcy?” and “How much debt do I need to file for bankruptcy?”These are common debts that can be discharged in bankruptcy.
- Unsecured credit card debt.
- Medical debt.
- Unsecured personal loans.
- Automobile deficiency.
These are common debts that cannot be discharged in bankruptcy.
- Secured debt (i.e. automobile, home).
- IRS tax debt.
- Student loans.
While unsecured credit card debt may be discharged (forgiven), other debts such as your mortgage may not be forgiven.Let’s next talk about the cost of these options and compare them to your alternatives.
Let’s next talk about the cost of these options and compare them to your alternatives.
2) Take a Free Should You File For Bankruptcy Quiz
As many people were struggling with debt when they contacted Ascend Finance, we built a 100% free “Should you file bankruptcy” quiz below (no email required) to provide an estimate of costs, qualifications, and pros and cons of bankruptcy while also providing the costs and bankruptcy alternatives. While the quiz will not tell you whether you should file (as we do not provide legal advice), it can hopefully help you understand more about your options to help you make the most informed decision.
3) So, How Much Debt is Enough To File Bankruptcy?
There is not a specific amount of debt a person must have before the person files for bankruptcy relief. If you owe $5,000 in credit card debt, you could file for bankruptcy relief. However, merely having the right to file for bankruptcy relief does not mean that it’s a good idea.
For example, if you earn too much income to meet the income requirements for a Chapter 7 case, you will file under Chapter 13. Chapter 13 is a bankruptcy repayment plan. If you retain an attorney, you may pay as much as $3,500 in filing fees and attorneys’ fees. Also, you must pay administrative fees in Chapter 13 and cannot incur debt or sell property while in the Chapter 13 repayment plan. Therefore, filing Chapter 13 for $5,000 in debt may not be a good option.
On the other hand, if you meet the income qualifications for a Chapter 7 case, do not have many assets, and file bankruptcy without an attorney, you could get rid of your $5,000 in debt in about four to six months.
The problem with this scenario is that you would not qualify for another bankruptcy discharge under Chapter 7 for eight years. If you lose your job, become disabled, or face another financial crisis within eight years, you would not be eligible for debt forgiveness under Chapter 7 if you needed it. You are also filing bankruptcy without an attorney, which means if you make a mistake, you could lose property or have your case dismissed without a discharge.
Should You File Bankruptcy If You’re in $20,000 in Debt?
If you take the bankruptcy cost calculator, and the cost in your area is around $1,000 with the $313 Chapter 7 filing fee, then you are looking at a payment of $1313 all in to discharge $20,000 in unsecured debt.
As stated above, we are assuming these are unsecured debts in this scenario (often credit cards, medical debt, personal loans, etc.). From a cost perspective, you are paying just 6.6% of the total debt, so that may sound like a good deal.
That said, here are a few things to consider:
- Are you 100% out of the financial hardship? If you discharge $20,000 in debt, will you have to accumulate more debt shortly after discharge?
- With Chapter 7, you may be able to only file and receive discharge once every 8 years, so you may want to ensure that you have a financial plan that can help you. For example, if you have medical bills, do you have better insurance that will cover those bills?
- Do you want to buy a house in the next few years? There may be certain restrictions to consider.
- What financial stress are you facing? You may be facing extreme stress of a wage garnishment vs. your accounts just going past due.
So, while Chapter 7 bankruptcy may be the cheapest debt option, you may want to look ahead to see whether it's worth it for you specifically to file bankruptcy for $20,000 of debt.
Let's talk about income vs expenses vs debts.
4) Income vs. Expenses vs. Debts
Before you decide to file for bankruptcy relief, you may want to take time to consider other options for getting out of debt. First, you want to consider how much you earn versus your expenses and your debts. Is your income sufficient to pay your ordinary living expenses with enough money left over to pay your debts? If not, you need to look for ways you can change your financial situation.
Earn More Money
Can you earn more income to help pay down your debts? Would your employer allow you to work overtime? Could you get a second job to earn additional income? Do you have a hobby that you could turn into a business, such as woodworking, sewing, or painting?
Depending on the amount of debt that you owe, increasing your income for six months to a year may help you pay off your debt without filing bankruptcy.
Reduce Expenses
At the same time, you are working to increase your income, you also need to review your budget to determine if you can reduce expenses. Sometimes, reducing expenses is sufficient to help you pay off debt without worrying about increasing income.
Debt Settlement
Debt settlement is another option for debt relief, your creditors may be willing to negotiate a lower payoff to settle your debt. However, the companies expect a lump sum payment to settle the debt. Also, the amount of debt “written off” or forgiven is likely to be included in your taxable income for that year, which could increase your tax liability.
Some individuals work with their creditors one-on-one to settle debts. However, there are also debt settlement companies that handle negotiations for individuals for a fee.
5) How Long Will It Take to Pay Off Your Debts?
Another factor to consider is how long will it take you to pay off your debts if you do not file for bankruptcy relief. For someone on a fixed budget who cannot reduce expenses or increase income, paying off $5,000 or $10,000 in debt may take three to four times as long compared to someone who can increase income and reduce expenses.
For example, if you owe $10,000 in credit card debt and can only afford to pay $235 per month, it will take you ten years to pay off the debt with an interest rate of 26 percent. You will pay almost $18,000 in interest for a $10,000 debt. That is assuming that your credit card company allows you to pay just $235 per month. The company may require a higher minimum payment each month.
Therefore, if your resources are limited, filing bankruptcy for a smaller amount of debt may be more practical for you than it would be for someone in a different financial position.
As with all other financial matters, it is essential to consider all factors relevant to your situation before deciding how to proceed. You should not base your choices for debt relief on another person’s choice for resolving debt problems. What works for your friend may not work best for you.
Confused about What to Do?
Are you confused? Do you need help? Ascend provides resources, tools, and information to help individuals get out of debt. We can help you if you are interested in filing for bankruptcy. Ascend can also help if you want to explore debt settlement or debt management options. You may also want to consider reading 8 other potentially costly mistakes to avoid when considering bankruptcy.
We want you to have all the information available about debt relief options so that you can choose the best option for you.