Filing bankruptcy when you have debt can provide a fresh start. Bankruptcy can indeed clear debts and bring much-needed relief but it’s not consequence-free.

If you decide to take that step you’ll want to make sure it’s worth it. But how much debt is worth filing bankruptcy? How do you know to choose Chapter 7 vs Chapter 11 vs Chapter 13 bankruptcy?

It all has to do with your income and ability to pay. A business owner hit by the recession may opt for Chapter 11 to reorganize and stay afloat. An individual with excessive credit card and payday loans may choose Chapter 7 to liquidate assets and erase debts. Another individual with a steady income but high debt could turn to Chapter 13 for a manageable repayment plan. 

Let’s go over when to consider bankruptcy, which type to choose, and if it’s the right choice for you. 

When it makes sense to file for bankruptcy

There is no minimum amount of debt you must have to file for bankruptcy. Whether you should file or not depends on how much money you earn and your ability to pay. It makes sense to file for bankruptcy when your unsecured debt – credit card debt, medical bills, personal loans –  are more than both your income and assets.

bankruptcy mortgage

If you face the following it’s time to consider bankruptcy:

  • The monthly minimum payments are more than your income.
  • You are unable to pay your debts.
  • You’re using a credit card to pay for basic necessities.
  • You consider borrowing from a retirement account to pay bills.
  • You use one credit card to pay off another.
  • You’re facing aggressive collection actions like wage garnishments and lawsuits.
  • The emotional or mental toll is overwhelming.

For instance, say you have a mortgage and owe the bank a total of $800,000 with monthly payments of $6,000. Your income is only $4,000 per month. You do have $30,000 in assets. Use these and you’ll be out of a payment method in about one year. In this case, filing for bankruptcy is a viable option.

If this is the case, and you’ve exhausted all other optionsdebt settlement, debt consolidation loan, negotiating with creditors, a debt management plan – then bankruptcy can help.

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What are the consequences of filing bankruptcy?

Bankruptcy filing can have several repercussions that can impact you for years. The biggest is it will significantly lower your credit score. A lower credit score makes it difficult to secure loans or credit cards with favorable interest rates, rent an apartment, or buy a car for the foreseeable future.

bankruptcy lower credit score

“Insolvency could affect credit scores,” says Amy Maliga, financial education specialist with the Nonprofit Credit Counseling Organization Take Care America. 

It’s impossible to say exactly how far your score will drop but in general the higher your score the further it will fall. If your score is above 700, it will likely fall 200-250 points. If it’s below 700, it should drop 100 – 150 points. 

Bankruptcy remains on your credit report for seven years if you file Chapter 13 and ten years if you go with Chapter 7. The good news is even though bankruptcy is still a negative mark on your credit report, you can begin rebuilding your score. Your score should start to improve right away if you file Chapter 7 and after 6 to 12 months if you choose Chapter 13.

Filing for Chapter 7 bankruptcy means you have to sell assets to pay creditors. These include real estate like a second home, luxury goods like a second vehicle, valuable collections, and nonretirement savings.

Your co-signer will still be on the hook for payments even if the debt has been cleared with Chapter 7. Chapter 13 does prevent creditors from pursuing co-signers.

Filing for bankruptcy is a matter of public record and carries a social stigma that affects personal and professional relationships. It can be seen as a personal failure, despite it being a legal tool for financial recovery.

Financial Factors To Consider When Filing Bankruptcy

Firstly you’ve got to examine how big or small your debt is. If your dischargeable debt exceeds $10,000, filing bankruptcy may be a good idea. Next, are your debts dischargeable? The most common dischargeable debt people who file Chapter 7 have is unsecured credit card debt and medical bills.

If you cannot pay your debts in six months and you will be worse off than before, bankruptcy is worth pursuing. It can also be a good idea if creditors threaten to sue you or garnish your wages. 

Which Debts Can’t Be Discharged in Chapter 7 Bankruptcy?

Chapter 7 bankruptcy can clear a judgment. Judgments that can be discharged in bankruptcy include credit card debt, personal loans, medical debt, utility bills, auto loans, judgments from debt collection agencies, and other unsecured debts. 

Not all debts can be erased with Chapter 7 bankruptcy. Some have to be paid regardless of successful filing.

debts not able to be discharged in bankruptcy

Debts that cannot be discharged include: 

  • Most student loans
  • Certain tax debt
  • Child support and alimony
  • Government-imposed restitution, fines, and penalties
  • Court fees
  • Personal injury debts from drunk driving
  • Debts owed to specific pension plans
  • Debts or items purchased within 90 days of filing
  • Debts not discharged in a previous bankruptcy
  • Other secured debts

When considering bankruptcy, it’s important to understand if your debts are dischargeable. If you have secured debt, it’s likely not dishchareable and you may want to consider a different route.

Eligibility for Chapter 7 or Chapter 13 bankruptcy?

Chapter 7 is the most common way to file bankruptcy. It’s attractive because it costs the least and allows you eliminate your debt. To be eligible for Chapter 7 bankruptcy you must not earn enough to pay your debts. You will have to pass a ‘means test’ and prove that your income for the last six months is less than the median income of your state. Otherwise, you must file Chapter 13. You do not have to be in debt a set amount to file Chapter 7. It’s all about your income level.

When you file Chapter 7 you will work with a court-appointed trustee to sell your property and use the proceeds to repay creditors. Property deemed ‘necessary to live’ cannot be sold. This includes your car, home, clothing, household goods, tools of your trade, and pensions. Luxury goods like an extra car, coin collection, second home, boat, and excess jewelry are not exempt.

If you have a stable income and your debts are below $2.5 million then you’re eligible for Chapter 13. If you’re debts are more than $2.5 million, you’ll have to file Chapter 11.

With Chapter 13 bankruptcy, the court will set up a payment plan for you to repay your debts. Payment plans can take three to five years to complete. In the end, you get to keep your assets. Chapter 13 prevents creditors from garnishing your wages or putting a levy on your bank account. It also prevents debt collectors from going after any potential co-signers.

Chapter 11 Bankruptcy vs Chapter 13

The choice between Chapter 11 bankruptcy vs Chapter 13 often comes down to whether the debtor is a business or an individual. Businesses tend to use Chapter 11 since it allows them to stay open and operating while repaying debts.

Chapter 11 is the most complex and expensive form of bankruptcy. It is what General Motors and Chrysler filed for in 2009. More recently J Crew, Bed Bath and Beyond, Hertz, and others filed Chapter 11 during the pandemic.

Chapter 13 is for individuals with stable incomes. It allows you to keep assets while following a manageable repayment plan under court supervision. It’s a good choice if you have a regular income and can meet the demands of a payment plan.

Filing for Chapter 11 bankruptcy vs Chapter 13 has everything to do with cost. The fee to file Chapter 11 is $1,738 while Chapter 13 is a measly $313 fee in comparison. That is why most individuals choose Chapter 13 if they’re eligible.


1. How much debt is worth filing for bankruptcy?

How much do you have to be in debt to file Chapter 7? The answer varies. A general rule of thumb is you need at least $10,000 in dischargeable debts to make bankruptcy worthwhile. This is due to its negative impact and fees.  

Another way to look at it is where will you be in six months? If you can make progress on your debts, wait. If you’ll be in the same place or worse then bankruptcy is for you. When deciding to file, it’s more important to consider your ability to repay your debts than how much debt you have.

MoneyFor is here to help people understand their debt, learn how to find debt relief, build credit, and more.

2. Where to start if you’re thinking of filing for bankruptcy?

Start by evaluating your financial situation. Gather all financial documents – debts, tax returns, pay stubs, and assets. Consult with a bankruptcy attorney – initial consultations are free – for guidance. They may have other suggestions for how to get out of debt. 

Many states require you to complete a credit counseling course, usually online. Counseling sessions often focus on responsible use of bankruptcy and credit cards, aiming to prevent future financial distress. Credit counseling from a nonprofit agency is free.

3. What happens if you ignore a debt collector?

Ignoring a debt collector is risky and can escalate the situation. The collector may get more aggressive, try to contact friends or family, or even file a lawsuit. A debt lawsuit can lead to wage garnishment, asset seizure, or a lien against your property. 

Ignoring a debt collector won’t erase the debt but can make your situation worse. It’s better to face debt collectors head-on.

If you are facing harassment from a debt collector, know that there are federal protections in place for the debtor.

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4. How long can you ignore a debt collector?

You can ignore a debt collector for several years as long as you don’t end up in court. Debts have a statute of limitations of three to six years – varying by state. The statute of limitations typically starts from your first missed payment but can restart if you attempt to pay the debt. 

Once the statute of limitations has passed, collectors can’t legally sue you, but they can still attempt to collect. Debts do not disappear until you pay, no matter how old they are.  

Bottom Line

How much you have to be in debt to file Chapter 7 or any other form of bankruptcy depends. It all hinges on your ability to pay. However, if you’re considering bankruptcy, chances are your debt has reached its limit and it’s time for you to act.

Bankruptcy filing can clear your debts but it’s not a quick-fix solution. There are negative consequences that will affect you for years to come. It can make it hard to take out loans, get a credit card, or even the job you want.

Before you choose this route, talk to a reputable credit counselor or bankruptcy lawyers and explore alternatives. Debt settlement may be an option or you could qualify for a debt consolidation loan where you make lower monthly payments. You may be able to find other forms of debt relief.

Consider a debt consolidation loan from Upgrade. Upgrade offers competitive fixed-rate loans for bad credit and fast funding. Their debt consolidation loans even come with discounts! Check your rate now – it only takes a minute.

If no matter what you do, you’re unable to repay your debts, bankruptcy may be your best option and give you a second chance.