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Can bankruptcy help with smaller amounts of debt?

On Behalf of | Jan 4, 2024 | bankruptcy |

People regularly file for bankruptcy in the state of Maryland. Many people may see bankruptcy as a way to escape their debts. They may even want to file for a relatively small amount of debt. This is likely not to work out as they envisioned.

The different kinds of bankruptcy

First, to understand what will happen during bankruptcy, you must understand that not all bankruptcies are identical. There are several kinds of bankruptcy. It goes from Chapter 7 bankruptcy up to Chapter 15. However, the kinds of bankruptcy most individuals go through are Chapter 7 and Chapter 13.

Chapter 7 and Chapter 13 bankruptcy

Chapter 7 bankruptcy is a traditional liquidation bankruptcy. A person’s unsecured and secured debts will be eliminated after liquidating their assets to pay off creditors. Certain kinds of debt, however, cannot be eliminated by bankruptcy. This includes:

  • alimony
  • child support
  • most tax debt
  • student loans (in most cases)
  • drunk driving legal judgments

Chapter 13 is even less likely to eliminate your debt. Instead, your debt will be reorganized into a new payment plan you will still have to pay off over several years. If you make too much to qualify for Chapter 7, you’ll likely have to use Chapter 13.

Bankruptcy for small debts

In certain cases, people with smaller amounts of debt, say around $12,000, may want to file for bankruptcy. Bankruptcy itself has some huge downsides. It will remain on your credit history for seven to 10 years. During that time, getting loans or credit may be difficult.

There’s also the fact the court itself could be skeptical of filing for bankruptcy for such a low amount. Overall, it’s best to exhaust all your resources before filing for bankruptcy. Paying off a $12,000 debt may be difficult but not impossible. Bankruptcy should be saved for situations in which paying off the debt is virtually impossible for a person.

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