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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.
What are the burdens you’re feeling right now?
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.
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.
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. 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.
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.
Once you’ve looked at your finances, the next step is to look inside.
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.
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 Bankruptcy.org for additional information and resources.
The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.
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.