Blogging for Change

Is Filing for Bankruptcy Right for You?

by Jesse Campbell on
5/8/2025
in Personal Finance
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The following is provided for informational purposes only. 

What are the financial 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 common factors that can lead individuals to file for bankruptcy.

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

If you're struggling financially and thinking about bankruptcy, consider the following questions. 

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.

Does your income qualify for bankruptcy?

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.

Census.gov maintains an up-to-date list of median household incomes by state. You can use this interactive tool to find the median income in your state and county. 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.

How to calculate disposable income

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% 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% of your unsecured debt, then you will probably qualify for Chapter 7.

Do you qualify for any alternatives?

Bankruptcy can be the right choice for a lot of people struggling with debt, but it can be costly and time-consuming. Before you jump into the bankruptcy process, have you explored other alternatives?

  • Debt consolidation loan: If your credit is still in good shape and what you really need is a single, manageable monthly payment, a consolidation loan might be a good option.
  • Debt management plan: A debt management plan with a nonprofit like MMI can consolidate your debts into a single payment, but it's not a loan so you don't need good credit to qualify. Even better, you can get your interest rates reduced, which helps you save money and get out of debt 7x faster than doing it alone.
  • Debt resolution or settlement: If you don't have the means to repay your debts in full, you may be better off using a debt resolution program to help settle your debts, repaying less than what you owe. This may be the ideal option if you're already severely delinquent and your debts are in collections. 

Bankruptcy can be a lifeline when you're overwhelmed with debt. It's just not a step to take lightly.

Not sure if bankruptcy is right for you? Connect with a certified financial counselor to discuss your debt repayment options. Counseling is free and confidential.

Tagged in Bankruptcy, Laws and legal questions

Jesse Campbell photo.

Jesse Campbell is the Content Manager at MMI, with over ten years of experience creating valuable educational materials that help families through everyday and extraordinary financial challenges.

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