The Should I File for Bankruptcy? Test
Before anyone decides to take action on whether or not bankruptcy is the solution to their financial solution, a true gauge of their financial situation must be taken into consideration. While a high amount of debt on say, a mortgage, may be daunting, depending on the payments and length of terms versus a smaller amount of short term, high interest debt, $20,000 of credit card debt may be a more difficult slope to climb than $200,000 in a mortgage.
How does one determine if a bankruptcy may be their best option? Rather than focusing on your long-term debt-to-income ratio, take a monthly snapshot of the following – your net monthly income, your monthly debt payments, and your necessary living expenses.
If your net monthly income is less than your monthly debt payments, this is an immediate red flag that action needs to be taken. However, if you are in a situation where an adjustment to your living expenses or lifestyle can alter your monthly balance, lifestyle choices may be able to fix your budget.
Consider that when filing for bankruptcy, alternative forms of income, albeit non-taxable, such as child support, alimony, gifts, and annuities, may count as income when filing.
Another way to check if bankruptcy may be an option is the “Chapter 7 Bankruptcy Means Test”. This test was designed to allow individuals who truly have a need to file bankruptcy under Chapter 7 instead of Chapter 13 the ability to do so. If your median income falls below the state or regional average based on your household size over a six month time span, you automatically pass. However, if your income is above this number, a series of financial factors based on your basic needs and adjusted cost of living take into effect.
Speaking with an attorney will give you a better idea of what the law sees as income and what your local and state laws translate into for your situation. The means test can be found at www.bestcase.com.