How much debt do you need to file for bankruptcy?

A common misconception is that there is a minimum debt threshold necessary to file a bankruptcy. There is no magic amount of debt required. The question, then — how much debt should I have to consider a bankruptcy — is less a legal question than a practical one, and is entirely based on the facts of your situation and your reasons for wanting the fresh start of a bankruptcy discharge.

As a practical matter, your debts should obviously be greater than the costs and fees necessary to file the case — otherwise, you should simply pay your debts. Beyond that simple consideration, the “smell test” is simply this — do you have the ability to pay your debts as they come due? If, due to high minimum payments, high interest rates, or a change in your income you do not have the ability to pay, then the amount of the debt is less relevant. Put another way, once your debts exceed your ability to repay, ten or twenty thousand dollars in debt might as well be a million dollars — because you can’t pay it back.

Your motives are another consideration. We have represented many individuals that wanted to clear their debts for a specific reason — perhaps a terminal illness (and desire to wrap up their personal affairs), a pending marriage (and the desire not to burden their prospective spouse), or some other major life event has created a need to “clean up” one’s finances. In such situations, the amount of debt is less important than the debtor’s desire to get the fresh start.

Another factor, often overlooked, is the type of debt owed. In bankruptcy, there is a significant difference between owing $10,000.00 to the IRS and owing the same amount to a credit card lender. Sometimes relatively small amounts of money owed to a particular type of creditor can cause a bankruptcy. Payday loans and other exhorbitant debts are a prime example of this.

Give us a call to discuss your situation in detail.


Divorce and Bankruptcy

One of the main causes of bankruptcy in the United States is divorce, which is certainly understandable — living expenses increase due to the addition of an additional household when one spouse leaves, while income generally remains the same or actually decreases. There is also an undeniable emotional connection between divorce and bankruptcy; in each situation, the parties are looking for a “fresh start” and wanting to sever as many of their connections as possible. 

It is also true that one of the main causes of divorce is bankruptcy. Financial problems are one of the leading causes of marital strife and divorce, and for some the stress of bankruptcy is the proverbial last straw in a troubled marriage.

The interaction of federal bankruptcy law with state laws regarding divorce is a complicated subject requiring the expertise of attorneys familiar with both topics. There are the issues of bankruptcy’s automatic stay (that stops all lawsuits, including divorces), the treatment of domestic support obligations like child support and maintenance, property distributions, division of debts, and many other topics that can arise depending on the chapter of bankruptcy involved, the assets and debts of the couple, and the timing of the filing of the cases.

Some key things to consider:

  • Only married couples can file a joint bankruptcy. Once the divorce is final, the parties can only file separate bankruptcy petitions.
  • Child support, and many other domestic support obligations, are not dischargeable debts in bankruptcy.
  • The divorce decree, unlike the bankruptcy, is not binding on creditors but only binds the former spouses as to payment of the debts. Specifically, a divorce decree cannot remove one of the spouses from a debt. For this reason, many divorce decrees contain provisions for payment or refinancing of debts.

There are many other factors that must be examined on a case-by-case basis. Give us a call to schedule an appointment if you have further questions on this complicated topic.


Qualifying for Chapter 7

Due to the widespread availability of information on the Internet, many people that may qualify for a chapter 7 bankruptcy — and a discharge of most debts in roughly four months — decide (incorrectly) that they do not qualify for chapter 7.

There are generally three ways to qualify for chapter 7. Note that all bankruptcy cases have a good faith filing requirement, in addition to the steps below.

Option 1: Income lower than Median Family Income. If your household income for the prior six months is less than the average family income in your home state, you should be eligible for chapter 7 relief.

Option 2: The Means Test. If, after applying certain guideline expenses to your last six months’ income, you have $150.00 or less per month with which to pay your general unsecured creditors (medical bills, credit cards, etc.), you should be eligible for chapter 7 relief.

Option 3: Special Circumstances. If you can prove that you have certain reasonable and necessary expenses that fall outside of the “means test” guideline expenses and that reduces your ability to pay to $150.00 or less per month to your general unsecured creditors, you should be eligible for chapter 7 relief.

The important thing to take away from this — it takes an expert looking at your entire situation to determine if chapter 7 is an option or if chapter 13 is a better fit for you. Give us a call and schedule a free appointment to go over your options with a qualified attorney.


Keep your retirement assets and life insurance through bankruptcy

One of the biggest assets owned by Americans, other than their homes, is their retirement plan. Through the explosion of 401(k) accounts and mutual funds over the past 25 years, many have assembled a significant retirement nest egg through regular payroll deductions. Of course, there’s a catch — the money is inaccessible without paying a hefty tax and penalty, and in some instances can only be withdrawn (or borrowed against) by a showing of financial emergency.

But having a significant retirement account doesn’t help you when a job loss, medical problem, business failure, death, or other financial disaster strikes. In those situations, a bankruptcy discharge may be the only way to get relief — and in doing so, you can keep your qualified retirement assets.

A “qualified retirement” asset is one that enjoys tax benefits, typically a combination of:

  • tax deductibility of contributions;
  • tax-deferred growth; and/or
  • tax exemption of proceeds upon proper withdrawal

And of course, all qualified plans have a 10% penalty (plus accrued taxes, if any) upon early/improper withdrawal.

The vast majority of employer-sponsored retirement plans (defined benefit pensions, defined contribution pensions) and employee-contribution plans (401(k)s, 403(b)s, many thrift savings plans, etc.) are qualified retirement plans. Individual Retirement Accounts (IRAs) and Roth IRAs are also qualified retirement plans. If you get a tax break on a long-term retirement savings account, chances are it’s a qualified retirement plan and exempt from creditors in bankruptcy. You can keep it!

The same is true for cash value life insurance policies. Many of these are called “whole life,” “straight life,” “variable life,” or “universal life,” and what they have in common is an accumulation of cash surrender value over time. Cash value life insurance is also exempt from creditors. This is important, as cash value grows on a tax-deferred basis in a similar manner to qualified retirement plans. You don’t pay the taxes until you take it out. For this reason, life insurance is used by some financial planners as a way to supplement those who don’t have a qualified retirement plan or who have maxed out their contributions.

The important message through all of this: bankruptcy doesn’t have to wipe out your retirement or life savings. If you have a financial crisis and need relief, don’t let fear of losing these assets keep you from consulting with a qualified attorney about your bankruptcy options.


Document, document!

One of the biggest challenges in bankruptcy cases is providing documents to the other parties (the court, trustee, creditors, etc.). These documents are of critical importance in the early part of every case when all the parties are evaluating the bankruptcy and determining whether to object.

What this means is really quite simple: you have to keep all of your important documents and have them available. Not only will it help during the case, we will need these documents at the outset to evaluate the case correctly to ensure we are using the appropriate chapter of bankruptcy and are protecting as many of your assets as legally possible.

This is what you’ll need at a minimum:

  • Drivers’ license or state identification card
  • Social security card or other proof of your SSN not generated by you (W-2s are usually sufficient)
  • Three years most recent tax returns
  • Seven months’ most recent pay stubs or other proof of income
  • Homeowners and Auto insurance declarations page (the page listing the coverages)
  • Proof of any unusually large necessary expenses (medical expenses, charitable contributions, car repairs, etc.)

If you don’t have all this right now, don’t panic. Just come in and see us. However, we will need all those documents, and possibly some other items, before we file the case. But by maintaining adequate records, you can help put your case on the fast track to resolution. Believe it or not, a large number of bankruptcy cases are dismissed — resulting in ruined credit and no bankruptcy discharge — simply because people don’t have their documents together.

Gene Sollows is the managing attorney for the Plano office of Bailey & Galyen. His common sense, down-to-earth approach and empathetic bedside manner make him uniquely qualified to handle the family and financial problems of north Texans.
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