When is the right time to file for bankruptcy?
Firstly, what is bankruptcy?
Bankruptcy is a process that gets rid of your debt while treating your creditors fairly. There are two kinds of personal bankruptcy: Chapter 13 and Chapter 7. Chapter 7 bankruptcy removes your debt by having a trustee (the court) liquidate (sell) your assets to pay your creditors, leaving you debt free. You can keep your home and some other property during this process. Chapter 13 bankruptcy is when you repay your creditors over a 3-5 year period as approved by the court.
Knowing when to declare bankruptcy can be incredibly challenging. This article will cover 6 main signs that can help you decide when you should consider filing for Chapter 7 or 13 bankruptcy. It will also address some general questions about what bankruptcy is.
Are there any specific times of the year when I should file?
No. The Eastern District of Michigan Bankruptcy court (Detroit’s bankruptcy court) takes bankruptcy cases throughout the year, so just file at a time most convenient for you.
So, When Should I Declare Chapter 7 or 13 Bankruptcy?
Simply put, you should declare bankruptcy when you owe more money than you can pay back. However, we strongly recommend that you ask yourself the following questions to see if filing for bankruptcy makes most sense in your unique situation.
Top 6 reasons you should file for bankruptcy
- You owe more debt than you can pay off
- Your creditors keep bothering you
- You’re considering debt consolidation
- You’re repeatedly behind on debt payments (mortgage, credit card, etc)
- Your household’s income is below Michigan’s average
- You want to get rid of your debt while keeping your home
Let's go through each of these one by one
1. You owe more debt than you can pay off
How much debt do you owe?
We recommend that you write out how much money you make, owe–in total and for every specific item– and to whom you owe it. This will help you determine if you’re a good fit for Chapter 7 or 13 bankruptcy and whether filing will actually help get rid of your debt. You must make below a certain amount of money each year be eligible for filing for Chapter 7 bankruptcy. Filing for Chapter 13 may make sense for you if you make more than this amount
What kind of debt do you owe?
After you know how much money you owe, make sure bankruptcy can help get rid of the debt you owe. Remember, bankruptcy can only erase or rearrange dischargeable debt, so filing for bankruptcy may only make sense if it will help discharge (get rid of) most of the debt you owe.
Declaring Chapter 7 or 13 bankruptcy does not discharge the following items:
- Most tax debts
- Student loans
- Child support and alimony
- Court fines & criminal restitution
- Personal injury cases that were caused by drunk driving or driving under the influence of drugs
- Any debt that was incurred through the act of fraud
Other debt-relief options may make sense if most of your debt is non-dischargeable.
Do you pass the means test?
In order to file for Chapter 7 in Detroit, you much pass the means test. This means that your household income must be equal to or lower than $51,411 per year for a household of one, equal to or lower than $62,000 for a household of two, equal to or lower than $75,951 for household of three, equal to or below $92,720 for a household of four, and equal to or below $101,742 for a household of five. You can access the means test forms on the U.S. Government’s site. For Chapter 13 bankruptcy, there isn’t a means test to determine if your income is too high. However, you simply have to demonstrate that you have the ability to pay back your debt. Chapter 13 only works to repay up to $394,725 in unsecured debt, such as credit cards, and up to $1,184,200 in secured debts, such as mortgages and car loans.
2. Your creditors keep bothering you
Do your creditors keep asking you for their money? Are you looking for a way to permanently end their contact with you? Declaring bankruptcy forces your creditors to stop bothering you (Chapter 7) or sets hard terms for their contact with you (Chapter 13). Chapter 7 or 13 bankruptcy can help you stave off your creditors for good.
3. You’re considering consolidating your debt
Consolidating debt means that you’ll take on another form of debt to pay off the debt you currently owe. This can get rid of your current debt, but you’ll still owe money, so consolidating debt only offers a temporary solution to the problem. Filing for Chapter 7 or 13 bankruptcy will help you permanently relieve your debts while equipping you with financial skills to avoid entering severe debt ever again. So we ask you, why would you consolidate your debt when you can get rid of your debt forever by filing for bankruptcy?
4. You’re repeatedly behind on payments
In this scenario, you may be able to make payments toward paying off your debt, but you always fall behind on your payments. This can lead to headaches, angry creditors, stress, and embarrassment. Declaring bankruptcy can get rid of these pain inducing payments once-and-for-all.
5. Your income is below Michigan’s average
Coupled with out-of-control debt, a low income can indicate that it may be time for you to file for bankruptcy. Filing for Chapter 7 or 13 may make sense for you if your debt is out of control and your income is below Michigan’s average yearly income for your household size. You need to make less income to file for Chapter 7, but you can still file for Chapter 13 bankruptcy if your income is above this threshold.
6. You want to get rid of debt while keeping your home
You should look into declaring Chapter 7 or 13 bankruptcy if you’re looking to get rid of your debt forever while keeping your home. Declaring Chapter 7 or 13 may be a viable option for you, since bankruptcy wipes out (Chapter 7) or rearranges (Chapter 13) your debt while allowing you to keep your home (link to other article about that).
In Summary
There are 6 signs that indicate you should consider filing for bankruptcy–being overwhelmed by debt, if you’re harassed by creditors, if you’re considering consolidating your debt, you’re behind on mortgage, your income is below Michigan’s average, or you want to get rid of your debt while keeping your home. We recommend looking into filing for bankruptcy if you have 1 or more of these 6 signs in your life. Browsing our other articles on bankruptcy can help you learn more about how filing for bankruptcy can help you positively change your life.
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