How Much Debt Before I Should File Bankruptcy?

$5,000?  $50,000?  $500,000?  How much debt do you need to have before it makes sense to file bankruptcy?

There is No Magical Amount!  
There is no particular debt limit that you must have in order to file a Chapter 7 bankruptcy.  It really depends upon what is going on in your life.  Life is not simple.  Some clients find themselves with good income, but are suddenly single parents with little disposable income.  Other clients are living on only social security income and have little debt.

A Little Debt....
I once had a client who have wanted to file a bankruptcy with only $4000 debt. In virtually all situations, this is not enough debt to justify filing bankruptcy.  However, a perfect world storm caused this case to be filed. First, income was almost non-existent.  Usually, this is not a problem once the creditor realizes the issue and will settle the debt for less than what is owed and what the client can afford to pay.  In this case, however, the creditor was stubborn, which made it stupid.  It wanted to be paid 100% and continued to proceed with a lawsuit, hoping to obtain a a judgment and a 25% wage garnishment.    No amount of persuading the creditor to take less worked.

Or, A lot of Debt ....  
I have had other clients who had $400,000 worth of debt and were fighting against filing a Chapter 7 and getting a fresh start.

The Key:  Can You Make A Dent in Your Bills if You Attacked It for 6 Months?
You have to determine whether or not you feel you can either pay your debt back over time or whether or not you need a fresh start to be able to survive.

I like the 6 month rule.  If you attacked your debt for six months, could you leave a dent?  Or, would you hardly leave a dent, instead you are just simply paying minimum payments, primarily paying interest.  If you don’t see your debt going down, then bankruptcy is probably a good solution for you to get out of debt once and for all and get back on your feet.  If, on the other hand, you feel you have the ability to make a significant dent in the debt, I think you should first try this approach.

Photo Credit: Alan Cleaver at Flickr