How Much Debt Do You Need to File Bankruptcy?

The answer is simple: there is no minimum.  You can technically file a bankruptcy with just a $1.00 of debt.

However, whether you should or not is a more difficult question.  I've seen people with under $5,000.00 of debt file because they had no income and essentially no ability to pay.  The creditors refused to negotiate, leaving the client with little choice.

On the other hand, I've had a client with over $10,000.00 of unsecured debt decide not to file, because his household income was enough to reasonably pay back the debt after making a few adjustments.  With these clients, I often recommend a certified non-profit debt consolidation agency.  Note this is NOT a debt settlement company!  A debt consolidation agency will help you adjust your budget, work with your creditors, and make a single payment to cover most of your obligations.

Also, it's important to know that bankruptcy isn't just about the amount of debt.  Sometimes it's about reversing a recent garnishment, or stopping a pending foreclosure.  In these cases, a person may have no unsecured debt, yet a bankruptcy is still an option.

In other words: it depends.  The only way to determine if bankruptcy is right in your situation is to setup a no-cost consultation to review your circumstances in detail.

What is the difference between secured and unsecured debt?

Lawyers like to use really fancy words, especially bankruptcy lawyers.  My favorite term is "executory contract" (an unperformed contract) because it's a term which even confuses other lawyers.

When discussing bankruptcy you'll hear the terms "secured" and "unsecured," often in reference to a creditor or debt.  Like most fancy terms, these have simple meanings.

A secured debt is a promise to pay where the creditor holds a lien on some property to ensure payment.  It's usually a home or car, but could be other personal property like a motorcycle or TV.  That creditor is called a secured creditor, and if the creditor is not repaid as promised, the creditor can undertake certain state remedies to take the property and credit the property's value towards the outstanding balance.

An unsecured debt is the opposite of a secured debt.  That is, it's a promise to pay without any liens on property.  This includes things like credit card debt, medical bills, or simple promissory notes.

The reason this is important is because bankruptcy discharges your personal obligation to repay a debt. With only a few exceptions, it does not discharge a lien on property.  This means you have to deal with a secured creditor in one of five different ways, which I'll cover in a later post.

It's important to note that some creditors can become secured.  Creditors like the IRS or State of Michigan often place "tax liens" on personal property or land, which makes their unsecured tax debt a secured debt.   Other creditors can do this as well once they obtain a judgment.

FAQ: Can I Choose Which Debts to Include in My Bankruptcy?