How to know if you need to file bankruptcy

It’s one thing to be burdened by a single bill. You may be able to negotiate a reduced settlement with your creditor to alleviate yourself of that pesky bill.

Debtors with multiple delinquent accounts don’t often have the luxury of negotiating balances. It’s unlikely that their various creditors will all agree to renegotiate. Situations such as these may call for debtors to file bankruptcy. You’ll need to pass the means test to qualify to file Chapter 7 bankruptcy.

What is the means test, and how does it work?

The U.S. Bankruptcy Court conditions its decision about whether to let a debtor file Chapter 7 bankruptcy on whether they pass their means test.

One of the first steps in this test is to add up your income during the six months leading to your bankruptcy filing. That income can come from a variety of sources, including:

  • Rental income
  • Child support
  • Farm profits
  • Disability payments
  • Unemployment benefits
  • Bonuses
  • Retirement benefits
  • Business profits

The bankruptcy court generally doesn’t figure in tax refunds or Social Security Administration payments as income.

The next step you’ll need to take is to compare that number to the Tennessee median. You’ll likely be eligible to file for Chapter 7 bankruptcy if your income is the same or less than the state median. However, you’ll need to follow through in taking the means test should your income exceed it.

The third step of the means test is to create a list of your allowable expenses. You’ll need to add up the expenses you have for food, housing and other necessities, then subtract the total from your income. That difference is your net income. You’ll then compare that amount to what you’re allowed to have for your household size. The bankruptcy trustee may dismiss your Chapter 7 case or convert it to a Chapter 13 (repayment) if your net income is too high.

How else to tell when you need to file bankruptcy

If you’re struggling with unsecured debts such as medical bills or credit cards, or you’re facing foreclosure after falling behind on mortgage payments, then bankruptcy may be the ideal debt relief option. This is particularly the case if a hardship such as job loss or illness leaves you with minimal prospects for bringing your debts current anytime soon.

Whether your test reveals that you can file for bankruptcy and for which type is contingent upon where you fall with the means test.

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