Managing finances on your own can be a tricky thing, especially if you feel like you are drowning in debt. Sometimes, you may even wonder how much debt you need in order to file for bankruptcy. Luckily, the federal government has some regulations in place that can help you understand whether or not bankruptcy is the right choice for you.
There is no rule that says that you must have a specific amount of money before you can file for bankruptcy relief. You can file for bankruptcy even if you owe as low as $5,000 as a credit card debt. However, the fact that you have the opportunity to file for bankruptcy on any amount doesn’t mean that you should do that. Filing for bankruptcy can change slightly based on where you live. So if you are wanting to file for Chapter 7 bankruptcy in North Carolina, it may look different from Chapter 7 bankruptcy in Washington.
Income Limits for Chapter 7 Bankruptcy
For example, if you earn above the income limit for a Chapter 7 bankruptcy, then you should file under Chapter 13 bankruptcy—Chapter 13 bankruptcy is a repayment plan. If you hire the services of an attorney to help with the process, you may have to pay as much as $3,500 in attorneys’ fees and filing fees. Also, you’re to pay Chapter 13 administrative fees, and you cannot sell your property and incur debt in an active Chapter 13 case. As such, it won’t be economical to file Chapter 13 bankruptcy for a $5,000 debt. To see how much debt to qualify for a bankruptcy discharge, invest time in understanding the Chapter 13 debt limits.
However, if you’re eligible to file a Chapter 7 case, file bankruptcy without an attorney, and if you don’t have many assets, then you can get a bankruptcy discharge in just Six months—in such a scenario, it makes sense to file for bankruptcy on $5,000.
The only problem you may encounter when filing for Chapter 7 bankruptcy is that you won’t qualify for this type of bankruptcy discharge until after eight years. As such, if you become disabled, face another financial crisis, or lose your job, then you won’t be eligible to apply for Chapter 7 bankruptcy even though you’re in dire need of it. Also, since you’re filing for bankruptcy without an attorney, it means that the chances are high that you’ll make a mistake, and any mistake you make means that you’ll get your case dismissed without a discharge or you could lose some of your assets.
1) Income vs. Expenses vs. Debt.
Before you file for bankruptcy discharge, you should first consider the options that are available for you to get out of debt. The first option to consider is your debt and expenses versus your income.
Is your income large enough to pay for your living expenses and your debt? If it isn’t, then you need to find other ways to savage your financial woes.
Earn More Money
Can you find other sources of income to pay your debt? Will your employer permit you to work overtime? Can you get a second job? Can you make money from your hobby?
Coming up with ways to increase your income for a few months can help you to pay off your debt without a bankruptcy case easily.
You need to cut down on your expenses if you want to have any significant improvement in your debt level. Sometimes, this may be all you need to get the extra cash that’ll help pay off your debt.
You should consider the debt settlement option together with cutting down on cost and increasing your income. Your creditors may want to negotiate for a lower payoff if they notice that you’re putting in an effort to repay your debt. However, you need to have a lump sum to pay off your debt at once, as that is usually the requirement. Also, the debt forgiven must be added to your taxable income, which in turn will significantly raise your tax liability.
You can choose to speak to creditors yourself or hire a debt settlement company to help you with the process.
2) How Long Will It Take to Pay Off Your Debts?
You need to consider the length of time you will spend trying to pay off your debt if you don’t file for bankruptcy relief. Generally, someone with a rigid budget will have problems increasing his/her income and reducing expenses. Thus, it will be more difficult for such individuals to pay off their debt than those who have a flexible budget that can allow them to increase their income and reduce their expenses.
For example, if you owe a credit card debt of $10,000 and you can only afford to part ways with $235 every month, then it will take you about ten years to pay off the debt if the interest rate is 26%. This will hold true if the credit card company permits you to pay $235 monthly. The Credit Card Company may demand that you pay higher than your monthly payment.
As such, if you don’t have sufficient disposable income, then it may be more economical to file bankruptcy for a small debt.
Every financial matter requires that you consider all factors that can affect your financial situation negatively and positively before coming up with a decisive strategy to remedy the situation. It’s important to keep in mind that your state can determine the specifics of your bankruptcy case. For instance, if you are filing for Chapter 7 bankruptcy in California, your bankruptcy will have California-specific requirements. Make sure you understand what your state specifies before getting started. Your debt relief strategy should be what works for you, and shouldn’t be determined by what worked for someone else.