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Filing for bankruptcy is rarely anyone’s first choice, but in today’s high-cost, high-rate environment, there are a lot of people considering this route. Credit card rates are averaging near 22%, after all, and household debt in the U.S. has soared past $18 trillion. The average cardholder now owes nearly $8,000 on their credit cards, too. So, if you’re strapped for cash and the compound interest charges are accruing on that amount of debt, making even the minimum payments could feel impossible.
If you’re struggling to juggle multiple bills and find yourself sinking deeper each month, you may also be wondering at what point filing for bankruptcy actually makes sense. But that’s a tough question — one without a simple answer. Bankruptcy carries serious consequences, but it also comes with powerful protections, including the ability to stop collection calls and wipe out certain debts entirely. So, in the right situation, it can be a lifeline.
How much debt is “enough” to justify filing, though? Is there a number that tips the scales? Below, we’ll examine when bankruptcy starts to make financial sense and what alternatives you may want to try first.
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How much should you owe before filing for bankruptcy?
Many people are surprised to learn that there’s no official minimum debt threshold to qualify for bankruptcy. Technically, you could file for bankruptcy with just a few thousand dollars of debt. But in practice, most people don’t go through the process unless they owe significantly more than they can realistically repay.
The general guidelines, though, are that it makes sense to take a closer look at bankruptcy once your unsecured debt, like credit cards, medical bills or personal loans, is more than half your annual income. For example, if you earn $40,000 a year and owe $25,000 or more in unsecured debt, especially if that amount is growing or your payments are just covering interest, it may be time to explore legal options. Other warning signs include:
- Making only the minimum payments: If you’re stuck in a cycle of minimums, your debt can snowball thanks to compounding interest.
- Borrowing from one card to pay another: This kind of strategy might keep things afloat temporarily, but it’s usually a sign that your debt load is unsustainable.
- Calls and lawsuits from debt collectors: If your debt is already in collections or you’ve been hit with a debt-related lawsuit, the window for affordable repayment options may be closing fast.
- An impact on your housing or utilities: Are you missing rent, mortgage or utility payments because you’re funneling all your cash toward debt? That’s a red flag.
In many cases, people wait too long to file. By the time they consider bankruptcy, they’ve already drained their retirement savings, taken out predatory loans or lost key assets trying to keep up with bills. So, if you’re feeling underwater and don’t see a clear path to getting current within the next five years, bankruptcy might be worth exploring sooner rather than later.
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What other options do I have to get rid of my debt?
Bankruptcy is powerful, but it also comes with long-term consequences. A Chapter 7 bankruptcy stays on your credit report for up to 10 years, and while you can rebuild your credit after filing, it may affect your ability to borrow, rent or even get a job in some cases. So, before you file, it’s typically worth looking at the alternatives, like:
Debt settlement
When you take this route, you or a debt relief company negotiate with your creditors to try and pay less than you owe, typically in return for a lump sum payment on the account. This can work if your accounts are already delinquent, but it also damages your credit and isn’t guaranteed.
Debt management plans
Offered through credit counseling agencies, debt management plans roll your unsecured debts into one monthly payment, often with reduced interest and fees. This allows the average person to pay off their debt in three to five years without going to court.
Debt consolidation loans
If your credit is still decent, you might qualify for a lower-rate personal loan to consolidate your debts. This can simplify the repayment process and save you money on interest charges over time.
Budgeting and side income
For smaller debt loads, cutting expenses, creating a realistic repayment plan and boosting your income with part-time work or gig jobs can go a long way.
Hardship programs
Some creditors offer temporary hardship programs and relief options — like payment deferrals or lower interest — if you’re experiencing financial hardship. It never hurts to ask.
The bottom line
There’s no standard number that says, “It’s time to file for bankruptcy.” But if your debts are spiraling, your income can’t keep up and you’ve exhausted other options, it may be the right move. Filing isn’t a sign of failure, either. It’s a legal way to reset your finances and move forward. But you shouldn’t wait until your back for your financial situation to worsen to start the process. The sooner you confront the problem, the more choices you’ll have, whether that means bankruptcy, settlement or a different kind of reset.
