Debt to Income Ratio in Bankruptcy by Rachel Lamey

A common misconception people have about filing bankruptcy is that the amount of debt a person has, or their debt-to-income ratio, is what qualifies them to file a petition. While the amount of debt is relevant to a petition, a person’s income is the number one factor in determining eligibility.

Let’s talk about how this works.

When you intend to file a bankruptcy petition, you are subject to what is commonly known as the “Means Test.” This is a test that measures your gross income over the course of a year, and your applicable expenses: those being the ones necessary for life, and within reason as determined by the IRS.

This income threshold is the first factor used to determine which, if either, type of personal bankruptcy you may qualify for. The second factor is the state and county in which you live, the third is the number of people in your household, and the fourth is your monthly budget.

Median income is the threshold by which we compare your income to. This is uniquely defined by the state and county you live in, as well as the number of people that you are legally and financially responsible for. Both of those considerations will naturally dictate higher or lower necessary expenses. If you fall above median income, you are only qualified for a reorganization, otherwise called a Chapter 13 bankruptcy. If you are below median income, you could possibly file a liquidation, otherwise called a Chapter 7 bankruptcy. However, a Chapter 13 bankruptcy may be an option for you regardless, depending on your specific needs and budget.

Once we have determined whether you are over or under median income, we then take your budget into consideration. The idea behind a bankruptcy is that with reasonable expenses, you either do or do not have excess income that could be used to pay off your debt. If you have notable excess income, a Chapter 13 can establish a single monthly payment, that is typically much lower than your other monthly payments, in order to restructure your debt in a manageable way. If you do not have excess income to make payments, then a liquidation is the logical option, should you otherwise qualify.

Notice how we haven’t spoken about debt at all yet? While there are debt maximums in a Chapter 13, there is no technical minimum. If you have under a certain dollar amount of dischargeable debt, then filing a bankruptcy could do more harm to you financially than it would benefit you. However, there is no set amount of debt that qualifies a person to file bankruptcy and, therefore, your debt-to-income ratio is not a factor in eligibility.

If you are thinking about filing for bankruptcy or are wondering if filing is a beneficial option for you, please feel give our office a call at 615-807-1240 to discuss your individual circumstances.

Post Authored by Rachel Lamey