Should You File for Bankruptcy? A Checklist

First thing’s first: there’s no blog post, magazine article, or checklist that can tell you whether or not bankruptcy is right for you. There are too many variables.

And bankruptcy is hard. It’s a hard process to go through and an even harder one to recover from. It’s enormous decision that will impact your life for nearly a decade. It’s a very complex, personal decision.

All that said, there are definitely signs that tell you when to start seriously considering bankruptcy as a possible solution.

Check all that apply

What are the burdens you’re feeling right now?

  • Loss of income
  • Overwhelming unsecured debt
  • Significant medical bills
  • Divorce
  • Foreclosure
  • Pending lawsuits
  • Garnished wages
  • Delinquent taxes

How many of these apply to you? They’re all the common factors that lead individuals to file for bankruptcy.

Any one of those things can potentially put you in a position where bankruptcy is the answer. It’s really about degrees. Consider what’s holding you back and ask yourself, “What can I do to fix this?”

Most of the difficulties that push us towards bankruptcy can be addressed. Some can’t. So take the time to sort out what’s put you in such a dire position and do your best to craft reasonable solutions to those problems. Speak to friends, speak to financial counselors. If there are no feasible solutions, bankruptcy might be the next step.

Do your liabilities outweigh your assets?

If you haven’t done it recently, take a moment to add up all of your liquid assets. That means the current value of your home, your car, your personal savings, retirement funds and investments (stocks, etc.). You don’t have to be exact, but put together a rough estimate.

Now add up your liabilities – that’s all your bills (credit debt, outstanding loans, medical bills, etc.).

Which one is bigger? If your liabilities outweigh your assets, that doesn’t necessarily mean you should file for bankruptcy. It just means you can put another checkmark in the “Maybe I need to talk to a lawyer” column. And the bigger the deficit, the bigger that checkmark should be.

Do you pass the means test?

A means test is a somewhat complicated formula that determines whether or not an individual is eligible to file for Chapter 7 bankruptcy. Since Chapter 7 includes total liquidation of all eligible debts (where everything gets wiped away), the test is designed to prevent those who have the “means” with which to pay back all or some of the debt from receiving this level of relief. Those who don’t pass the means test for Chapter 7 bankruptcy are still eligible for Chapter 13 – which functions more as a repayment plan.

As noted, the means test for bankruptcy is complicated and your attorney will walk you through it if you decide to file, but there are a few general guidelines that can tell you right off the bat whether or not you qualify for Chapter 7 bankruptcy.

Check your income maintains an up-to-date list of median household incomes by state. Find your state and your family size on this chart. Is your monthly household income less than the median for a family your size in your state?

If yes, then you qualify for Chapter 7 bankruptcy – no other equations necessary.

If no, you may still qualify, it’s just a bit more complicated.

What’s your disposable income?

To understand disposable income, you have to understand “allowable expenses.”

The IRS maintains a list of National Standards for what they consider to be the five necessary expense categories: food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous. Additionally, the IRS maintains national and local standards for transportation, housing, utilities and more.

The standards represent the accepted amount each category should cost each month, and varies depending on the size of the household. These are your allowable expenses.

In order to find your disposable income (for bankruptcy filing purposes), you take your monthly household income and subtract the allowable expense for every category (based on the size of your household). What’s left over is your disposable income.

Now take your monthly disposable income and multiply it by 60. That gives you your projected disposable income over five years. If it’s less than $6,000 you’ll very likely qualify for Chapter 7 bankruptcy. If it’s more than $10,000 you probably won’t qualify.

If it’s between $6,000 and $10,000 it’s even more complicated (I warned you).

Basically, you need to compare your projected disposable income over five years to your current unsecured, non-priority debts (credit card debts, medical bills, unsecured personal loans, etc.). If your projected disposable income is more than 25 percent of your unsecured debt, then you would likely not qualify for Chapter 7 bankruptcy (the thought being that you’ll have enough money available to make some kind of repayment on your debt.)

If your projected disposable income is less than 25 percent of your unsecured debt, then you will probably qualify for Chapter 7.

Check your feelings

Once you’ve looked at your finances, the next step is to look inside.

  • Have you tried alternatives and they just haven’t worked?
  • Do you feel “done with it”?
  • Do you understand how you got to this point and what you need to do differently to avoid repeating your mistakes?
  • Are you prepared to do the hard work of filing bankruptcy and the even harder work of starting over?

Chances are good that once you’ve gone through all the numbers and calculations you’ll know on some level what you need to do.

Don’t go alone

The idea of bankruptcy is, in a way, the idea of letting go. It’s an admission – not of failure, but of a need for help.

If you decide to file for bankruptcy, don’t be embarrassed and don’t go alone. Talk about it with the people who matter most to you. Let them know why you’re doing what you’re doing. Let them support you.

If you have more questions about bankruptcy or need help finding a qualified attorney in your area, visit for additional information and resources.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.