If you're thinking about personal bankruptcy, you're looking at some hard questions and harder choices, especially under the newest bankruptcy law. Answer the questions in the following list to figure out whether you should consider bankruptcy and what type:
Can you pay off your debts (except mortgages) within three years while maintaining an objectively tolerable standard of living?
YES: Congratulations! You're probably on fairly solid financial footing.
NO: Consider bankruptcy. Depending on your circumstances, your options may be
Chapter 7, in which many of your debts are forgiven immediately and you surrender nonexempt property (96 percent of filers don't lose any of their assets).
Chapter 13, where you pay a portion of your debts over three to five years.
Is your median income greater than the median income for your state?
YES: Your repayment plan must run for five years if you go the Chapter 13 route. Your Chapter 7 may be dismissed if your debts are primarily consumer debts and you flunk the Means Test (see Step 5).
NO: You automatically pass the Means Test. If you choose Chapter 13, your repayment plan can span only three years. The five-year repayment plan is not required (meaning that you're not get stuck committing all of your disposable income to a repayment plan for five years).
Do you have nonexempt property that you want to keep? Do you need time to catch up on your mortgage? Do you owe taxes or support obligations that you want to pay off over time without being hassled?
It varies by state, but generally homesteads, pensions, cars, and household goods are exempt.
YES: Consider Chapter 13 bankruptcy. If your income is greater than the median, you have to pay for five years. Otherwise, a three-plan is an option.
NO: Consider Chapter 7 bankruptcy.
Are your debts primarily consumer debts and your income greater than the median?
YES: Take the Means Test, outlined in Step 5.
NO: Choose either Chapter 7 or Chapter 13 — whichever is more beneficial to you. See Chapter 4.
Do you pass the Means Test?
Deduct the following monthly expenses from your gross monthly income:
IRS living, housing, and transportation expenses (excluding mortgage and car payments)
Mandatory payroll deductions (taxes, FICA, and repayments on pension loan) and future support obligations
Health insurance premiums
Debt payments, such as regular mortgage and car payments, 1/60 of past due mortgage and car payments, and 1/60 of past due support obligations
Is the difference between your monthly expenses and gross monthly income less than $100? (If the difference is more, proceed to Step 7.)
YES: You pass the Means Test and may choose between Chapter 7 and Chapter 13.
NO: You may be restricted to Chapter 13.
Is the difference between your monthly expenses and gross monthly income between $100 and $166.66 per month and less than 25 percent of your unsecured nonpriority debts (regular obligations such as credit cards and medical bills divided by 60)?
YES: You pass the Means Test.
NO: You're limited to Chapter 13.
Is the difference between your monthly expenses and gross monthly income more than $166.67 per month?
YES: You're limited to Chapter 13.
NO: Choose between Chapter 7 or Chapter 13 — whichever is more beneficial to you.
