When You Have Enough Debt (And When You’ve Got Too Much)

When You Have Enough Debt (And When You’ve Got Too Much)

By |May 30th, 2013|

bankruptcy debt limitsDo you owe too much? Too little? When filing for bankruptcy, one answer points to a rule yet the other points inward.

If you’re in over your head and are thinking about filing for bankruptcy, you’ve got too much debt.

That’s an objective measure, though. What is “too much” for me would be inconsequential for Kobe Bryant. On the flip side, what’s considered “too much” for a third-grader is likely going to be pretty small in my eyes.

Let’s take a look to see where you stand on the spectrum.

Debt Limits In Chapter 7 and Chapter 13 Bankruptcy

There is no debt limit to file for Chapter 7 bankruptcy. If you qualify for Chapter 7 bankruptcy based on means testing, you’re good to go.

The same is not true for Chapter 13 bankruptcy. As of April 1, 2013 you can file for Chapter 13 bankruptcy only if you have below $383,175 in unsecured debt and $1,149,525 in secured debt.

If you owe too much secured or unsecured debt, you need to file a Chapter 11 bankruptcy.

How Much Is Enough To File For Bankruptcy?

Here’s a simple three-part test to figure out if you owe enough money to file for bankruptcy.

  1. Can you afford to stop using all of your credit cards and lines of credit and make timely payments without cutting back on necessities such as food and clothing? If YES, then you may not need to file for bankruptcy.
  2. If you do nothing, will you be in less debt in 36 months than you are now? If YES, then you may not need to file for bankruptcy.
  3. Do you owe more than twice the amount of the legal fee for an attorney to represent you in a bankruptcy case? If NO, then you may not need to file for bankruptcy.

Once we get past these three questions, we can start looking at your overall financial health and whether bankruptcy is a good tool for your financial planning.

Yes, bankruptcy can be a financial planning tool for some people.

Regardless, it’s important to recognize that though there’s a ceiling for Chapter 13, there’s seldom a floor.

Image credit:  Steven River

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About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.