Key takeaways

  • There is no minimum amount of debt required to file for bankruptcy. That said, if you have less than $10,000 worth of unsecured debt, it's probably not worth it due to lawyer fees, plus long-term consequences.
  • Filing for bankruptcy can bring relief if you're overwhelmed with debt and unable to pay your debts while maintaining a minimum standard of living. But it should only be pursued as a last resort, as it will damage your credit and impact your finances.
  • Consider debt payoff strategies, debt consolidation loans, reevaluating your budget or working with a debt relief company, among other options to get out of debt without filing bankruptcy.
If you’ve accumulated $12,000 in debt and feel overwhelmed, filing for bankruptcy may seem like a solution. While it’s true that filing for bankruptcy can bring some much-needed relief if you’re unable to pay your debts, it also comes with some negative consequences.

Bankruptcy will weigh on your credit for years to come and can make it difficult for you to secure an apartment lease or even obtain a job. These are reasons bankruptcy should almost always be reserved as a last resort. Make sure you consider other options before pursuing this route.

How much debt is worth filing for bankruptcy

No minimum amount of debt is required to file for either Chapter 7 or Chapter 13 bankruptcy. Still, it’s important to think carefully about your situation and weigh your options before doing so, as it’s a decision that will have ripple effects on your finances.

“Anyone can file, but you have to assess whether it’s the right tool to solve your problem,” says New Jersey bankruptcy attorney Edward Hanratty.

“I usually tell people that if the amount of debt they’re facing can be paid off in the next six months in some realistic way, then bankruptcy is probably not the best tool for them. However, if there’s a reasonable chance that they will be in the same position in six months, or worse off, then bankruptcy can be a great tool to solve the problem,” he adds.

Many bankruptcy lawyers advise against filing for bankruptcy if you have less than $10,000 in dischargeable debt, particularly because the legal fees and filing costs would outweigh any potential benefits associated with filing.

“The average cost of filing can range anywhere from $1,000 to more than $5,000 depending on the state you file in and any associated attorney costs,” says Adam Selita, CEO of The Debt Relief Company.

Aside from the financial considerations of declaring bankruptcy for just $12,000 in debt, the courts generally want to ensure that those pursuing such an option are doing so in good faith. Hanratty says that if a court decides you did not file in good faith but rather to avoid paying debt, you may be barred from filing again in the future.

What are the consequences of filing bankruptcy?

Filing for bankruptcy is tied to several ramifications, which could impact you for years. Among the most significant consequences is the impact on your credit profile.

“Bankruptcy will cause your credit score to drop,” says Amy Maliga, financial educator for the non-profit credit counseling company Take Charge America.

“Perhaps counterintuitively, the higher your credit score is when you file bankruptcy, the bigger hit you’ll take. On average, someone whose credit is very good or excellent at the time of filing will see their score drop from 200 to 240 points, while someone with only fair credit will notice their score drop anywhere from 130 to 150 points.”

A bankruptcy will also stay on your credit report for a minimum of seven years and, in some cases, could linger as long as 10 years. The bankruptcy notation on your credit profile and the initial drop in credit score will make it more challenging to borrow money at reasonable rates for the foreseeable future.

Bankruptcy filers who apply for new credit will be faced with high-interest rates, less than optimal payback terms and may even need a co-signer to obtain a loan, said Maliga. And there’s yet another drawback to consider when it comes to personal loans and bankruptcy filings.

“If any of the loans you discharge in bankruptcy has a co-signer, that person will now be responsible for repaying the outstanding loan balance,” says Maliga.

You may also be required to surrender certain possessions as part of the bankruptcy filing process to repay creditors. Maliga says that these possessions can include vacation or rental properties, valuable art, stamp or coin collections, fine jewelry, designer clothing, antique furniture, certain investments and other items at the court’s discretion.

How to get out of $12,000 worth of debt

Because there are so many potential downsides associated with declaring bankruptcy, it’s a good idea to treat it as a last resort and consider some of the other alternatives first.

Debt consolidation

Debt consolidation typically involves obtaining a loan from a lender and using the proceeds to pay off all your debts. This approach leaves you with a single loan payment that should ideally be easier to manage.

When looking for a debt consolidation loan, make sure you’re getting a lower interest rate than what you currently pay on your debts. Also, consider the loan’s terms and fees to ensure the loan is a good deal and works for your financial situation.

If your credit isn’t in mint shape, try finding a lender that allows you to apply with the help of a co-signer, as this could boost your chances of approval with favorable terms.

You’ll also need to change your financial habits to succeed over the long term.

“You’ll need to have the discipline to stop using credit cards; otherwise, you’ll end up making your loan payment as well as credit card payments,” says Maliga.

Debt snowball strategy

The debt snowball strategy involves paying off your smallest debt first and then applying the money you used toward that paid-off debt to attack the next-smallest debt. This strategy allows you to build momentum or “snowball” your payments as you pay off each subsequent debt.

Here’s how the debt snowball method works:

  • List all your debts by balance— from smallest to largest.
  • Pay as much as you can on your smallest balance while still making minimum payments on your other debts
  • When you pay off your smallest balance, snowball your payment onto the next-smallest debt.
  • Repeat the process until you are debt-free.

“The debt snowball method can be especially effective for someone who has several credit cards with relatively low balances and for those who need to see quick progress to stay motivated,” said Maliga.

Debt avalanche strategy

The debt avalanche strategy involves paying the debt with the highest interest first and working down from there. The benefit of this approach is that the less you pay in interest, the more money you should have available to put toward the principal repayment.

“Overall, the avalanche method will get you out of debt quicker while saving more money,” says Sean Fox, president of the debt settlement company Freedom Debt Relief. “That’s because high interest rates compound quickly and can keep you in debt for a very long time. So, if you pay more on the debt with the highest interest rate, you’ll reduce the amount you spend on interest every month.”

Even with this approach, paying a debt in full could take months or years. For many people, it can feel like little progress is being made, which can be a temptation to quit this approach.

Debt relief services

Debt relief can mean different things but is commonly referred to as debt settlement, debt resolution or debt negotiation. Debt relief companies, which the Federal Trade Commission regulates, will work on a consumer’s behalf to negotiate a debt repayment that’s less than what you currently owe.

Working with a debt relief company can take an average of two to five years to completely resolve debt, depending on the individual’s situation. For this solution, you’ll typically need to have at least $10,000 worth of unsecured debt, as that’s the minimum amount required by most companies to work with you.

If you’re considering debt relief services, it’s important to research the companies providing this service to identify those that have been in business for several years and have a substantial track record of experience.

“A debt settlement company that has a long history, and a history of working with your creditors, means greater expertise,” says Fox.

It’s also important to work with a company whose staff is readily available to answer any questions you may have.

Budget reevaluation

One last approach to avoiding a bankruptcy filing is a complete budget revamp. This involves reworking your budget to eliminate all unnecessary spending and putting every dollar you can toward paying down debt.

“This means spending only on essentials, like housing and food, and putting wants — including leisure travel — on hold until you can get your debt under control and find yourself in a more stable financial situation,” says Maliga.

If you need help working out a budget, financial advisors or nonprofit credit counseling can be an effective tool. In addition to reviewing your income, expenses and debts and helping you plan a budget, trained credit counselors can offer additional solutions for paying off debt.

The bottom line

While no minimum amount of debt is required to file bankruptcy, remember that taking this step will have ramifications for years to come. Consider all of your options before making such a significant decision,

While bankruptcy can serve as the fresh start you may need, it’s not a quick or easy fix to debt challenges. If you’re considering bankruptcy, speak with a professional first to review the costs and alternatives.