When do you file bankruptcy?


Quick Answer

Generally, an individual may choose to file for Chapter 7 personal bankruptcy relief when his expenses and bills outstrip his income. However, a person who wants to file personal bankruptcy must meet eligibility requirements by either proving low income or passing a means test, according to the American Bar Association.

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Full Answer

Chapter 7 bankruptcy law allows a person overwhelmed with debt to discharge most of the bills owed and start over with a clean slate. To prevent abuse of the law where a person may run up bills just to have them discharged, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. As of 2014, under this law, a person who wants to file for bankruptcy must have more debt than income and earn less than the median income in the state where he lives to be automatically eligible to file, notes the American Bar Association.

A person who earns more than the state median but has more debt than income must pass a means test to be eligible for Chapter 7 bankruptcy relief, explains Nolo. The court applies a complex formula to the individual's personal finances, deducting specific monthly expenses from average monthly income over a six-month period to determine disposable income. A person with high disposable income is more likely to be denied debt relief under Chapter 7.

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