If you are faced with overwhelming debt, bankruptcy may be a solution for your problems. There are restrictions that control who can declare bankruptcy, so if you are wondering should I file bankruptcy, it is important to understand the rules when weighing your options.
If you are interested in filing bankruptcy Chapter 7, the type of bankruptcy that completely wipes out most of your debts and lets you start fresh, you must pass a bankruptcy means test. The only people exempted from this are disabled veterans filing for bankruptcy to discharge debt incurred while they were on active military duty or people with debt that comes from operating a business. Everyone else must pass the means test.
Understand median income
The first step in the means test is monthly median income. If your current income is lower than your state’s median income for a household of your size, you immediately qualify to file. Income includes: wages, salary, tips, bonuses, commission, overtime, business income, interest, royalties, child support, spousal support, unemployment, worker’s comp, annuities, retirement income, rent, and dividends. It does not include Social Security retirement benefits or income tax refunds.
Find your disposable income
If your monthly income exceeds your state’s median income, then you need to do some calculations to answer the question, "can I file bankruptcy?" You must first calculate what your allowed monthly expenses are. You can’t use your actual expenses—you must rely on the standards set for your area. These vary by location and state, since the cost of living is higher in some places than others. You can also include additional expenses such as taxes, health insurance, uncovered health costs, secured debt payments, child support, child care, charitable contributions, education required for your employment, education costs for a disabled child, or the costs you pay for the care of an elderly, ill, or disabled family member.
Deduct these total costs from your income and this is your disposable income. If there is enough disposable income left over that would allow you to pay at least part of your unsecured debts to reach a limit set by the bankruptcy court, then you have failed the means test. You cannot file for Chapter 7. In this situation, your case will be converted to a Chapter 13 case in which your debt will be discharged in exchange for a payment program you must follow over to a three- to five-year period.
Bankruptcy means test calculator
If all of this math seems too complex, you can use an online bankruptcy means test calculator. This will do the math for you and it is location-specific so it will give you the correct answer based on local expense standards. You will need to have your income ready to enter into the calculator.
Other bankruptcy requirements
If you are considering when to file bankruptcy, there are some time limitations. If you previously had your debt discharged in a Chapter 7 bankruptcy within the last eight years or in a Chapter 13 bankruptcy in the last six years, you do not qualify for declaring bankruptcy. If you had a Chapter 7 or Chapter 13 bankruptcy that was dismissed within the last 180 days because you violated a court order, the filing was fraudulent, or you requested a dismissal after a creditor requested the automatic stay be lifted, you are ineligible to file again at this point.
To file bankruptcy you must also meet the credit counseling requirement. One-hundred eighty days before you file for Chapter 7, you must participate in a credit counseling program offered by a nonprofit agency that is on the U.S. Trustee’s approved list. The only exceptions to this requirement are people with physical or mental disabilities or those on active military duty in a combat zone.
Bankruptcy can provide a great sense of relief, but you must meet all of the requirements before you can file. Taking the time to be sure you qualify can streamline the process.
If you are considering bankruptcy, LegalZoom might be able to help. Start by answering a few questions about your situation and receive a free bankruptcy evaluation by a participating law firm.