“Should I File for Bankruptcy?” Part 1: How Much Debt Is Enough?

“Do I have enough debt to file for bankruptcy?” Many are reluctant to consider filing, even when they’ve been laboring under the yoke of excessive debt payments for long enough that they can’t easily meet their own needs. Their mental health may even start to suffer. It’s understandable; we’ve been taught that being unable to pay for your own needs and wants is a personal or ethical failure, regardless of what happens in your life. As I’ve written before, I think our collective attitude toward consumer debt is promoted by the credit card, retail, and health care industries and mostly helps them make money. They have set up the system to keep themselves profitable even as our finances suffer. 

Still, it’s true that there is some social stigma attached to bankruptcy. Filing will affect your credit, also true. It’s possible it could end with you losing some of your property (though not as much as you might think). Filing for bankruptcy feels like a big step because it is. I wish more people would see it as a positive step, though. And so I’d like to offer a bit of a guide to what circumstances make it worth considering bankruptcy and at least talking to an attorney. In this post I’ll talk about the legal requirements for filing and what amount of debt should prompt you to think about filing. Because this is a nexus between law and finance, two notoriously complex fields, there are myriad other considerations. I plan to follow up with a series of posts about other factors, including: things your creditors might do that should prompt you to find a lawyer, what type of debt you have, and your credit score.

This post will lay out some legal requirements, followed by my rule of thumb for how much debt is enough, and then a few examples of situations that might demonstrate that you should think about filing. First, though, I should point out that this is not intended to be legal advice. Before you actually decide to file for bankruptcy I highly recommend that you consult a lawyer. Bankruptcy is a complicated legal process and you can’t be expected to learn it in an afternoon of internet searches. While this guide is as accurate as I can make it, without knowing the details of your case it is impossible to say whether or not you should file.

Legal Requirements

The Bankruptcy Code, Title 11 of the overall US Code (the nation’s collected laws), has fairly minimal requirements for filing. Most of them concern which type of bankruptcy a particular person or business qualifies for. If you don’t want to read a bunch of technical requirements and citations to the Code, feel free to skip to “How Much Debt is Enough?” below. If you are curious or concerned, read on!

The Code first defines the word “debtor” to mean, “a person. . . concerning [whom] a case under [the Code] has been commenced.”* It’s simple enough to almost be redundant, which is probably why in a later section the Code specifies who is allowed to be a debtor. Why it didn’t simply say, “here are the requirements for filing:...” instead of attaching the requirements to a definition several sections away isn’t clear, but no one is saying the Code was written for readability. 

In any case, to be a debtor you must either live in the US or have property here.† To file under Chapter 7 you can’t be a railroad, financial institution, or foreign insurance company or bank. ‡ Sorry to any foreign currency railroads reading this! Individual (i.e. non-business) Chapter 7 filers also have to meet the “means test,” probably the subject of another post, but it doesn’t actually prevent you from filing, per se. To file under Chapter 13, a debtor has to have regular income and come in below its debt thresholds (they’re pretty high, don’t worry about it too much).|| Same with Chapter 12, except that you have to be a family farmer or fisher, meaning more than 50% of your income and debts come from farming. ¶ Individual filers have to attend approved classes on personal finance.**

There are also a few disqualifying factors. You can’t file a Chapter 7 if you’ve received a discharge in the past eight years, or a Chapter 13 discharge in the past six.†† For Chapter 13, you only have to wait four years after a Chapter 7 discharge and two years after an earlier Chapter 13. ‡‡ 

That’s pretty much it, though. There are no minimum debt limits or maximum amounts of wealth or income. Those factors can play into what type of bankruptcy you file and what debts get discharged, but otherwise, anyone willing to take on the costs of filing, financial and otherwise (e.g., time, emotional toll, etc.) is eligible to file, as long as they haven’t abused the system in the past. 

How Much Debt Is Enough?

No one should, or probably would, think about filing bankruptcy if they weren’t in financial distress. The question for most people who might be reading this is really “how much debt is enough?” And, what luck, it’s the main question this post is trying to answer! Of course, the answer is not as simple as a single number. Some sources will tell you $10,000 is the bare minimum of unsecured debt needed before you should even think about filing. It’s not a terrible rule of thumb for those with income close to the median for wherever they live (about $62,000 per year for an individual in Minnesota), but there are so many other factors to consider that I think it’s misleading. There are those who have a lot less debt than that who could still benefit from a discharge because they make a lot less money. And some who make a lot more money can afford to carry many times that amount of debt. 

While no single number is The Threshold for filing, there is a pretty easy test for whether you should at least seriously consider it: are you able to make debt payments, on time, while also paying for the things you need right now? If not, or if it’s difficult to make ends meet every month, then you should definitely talk to an attorney about filing bankruptcy.

Signs You Might Have Enough Debt

Here are some common examples of when someone has enough debt to think about filing:

• If you are using credit cards to pay for everything, and just barely keeping up with minimum payments, it might be time. 

• If you have maxed out one or more credit cards and/or have tried to get more but haven’t been approved, it might be time.

• If you are using one credit card to pay off the balance on another, the time may have come. 

• If you won’t be able to pay off your debts (other than your mortgage) in the next five years or so, you should probably think seriously about filing. 

• If your debt payments have you thinking about taking out a payday loan to cover your mortgage or rent, think about filing bankruptcy instead. Those things are toxic.

• If you already took out a payday loan and are caught in the never-ending payment scheme they create, bankruptcy could end the cycle.

The bottom line is, if you are spending more of your paycheck paying for things you bought in the past than for things you need now it is probably worth your while to talk to a bankruptcy expert.

Talk to an Expert

If you are thinking seriously about bankruptcy, you should definitely talk to a lawyer about it. I can opine all I want about legal, financial, and ethical issues, but if your instincts are saying it’s worth looking into, then go for it. If you’re mostly curious, if you have a lot of debt but think you have to suffer a while before talking to someone about bankruptcy, you too should probably at least talk to a lawyer. Most bankruptcy attorneys offer free consultations, and the majority will give you their honest opinion about whether bankruptcy is in your best interests. It’s an ethical requirement in our profession, and we want our clients to be happy with our work. Plus, if you’ve read this whole - perhaps overly wordy, sorry, it’s character flaw - post, you will have some criteria to compare their advice to, and maybe even informed questions to ask. 

And, shameless plug time, if you live in Minnesota and want to find a bankruptcy attorney to talk to might I suggest clicking here?

Thanks for reading, good luck finding your fresh financial start!

Hey look, footnotes!

*11 U.S.C. § 103(13). 

†11 U.S.C. § 109(a).

‡Id. § 109(b).

||Id. § 109(e).

¶Id. § 109(f), 11 U.S.C. § 101(18).

**11 U.S.C. § 521(b).

††11 U.S.C. § 727(a)(8)-(9).

‡‡11 U.S.C. § 1328(f).