What can I do if I owe more money than I can pay?

If you cannot make your payments as they come due, you should contact your creditor as soon as possible, explain your situation, and seek to work out a new payment schedule or extension. Never ignore your creditors. Always be courteous and explain your situation.

If your creditor will neither give you an extension of time nor reduce your payments, you may have to file bankruptcy. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, you must undergo a “means test” to qualify for Chapter 7 (liquidation) bankruptcy. The means test is used to determine who can file for Chapter 7 bankruptcy. Your income and expenses are examined in detail to see how they compare to the standard for your area as set by the IRS and the Census Bureau. If you earn less than the median income for a family of your size in your state, you can file for Chapter 7 bankruptcy.

But if your income from the last six months is greater than the median income and you can pay at least $7,700 over five years or $128 a month toward your debt, you are not allowed to file for Chapter 7 bankruptcy but must file for Chapter 13 bankruptcy instead. Chapter 13 (reorganization) bankruptcy will require you to use all of your “excess” income to repay a portion of your debts over three to five years. A part of the means test requires that you file any overdue tax returns within weeks of filing a Chapter 7 bankruptcy.

Also, under the law, when you file for bankruptcy you must receive approved credit counseling and a budget analysis at your own expense. Credit counseling should address the means test calculation for you. Bankruptcy should be seen as your last resort if you are in financial trouble and should be chosen only after very careful consideration. Additionally, some debts are not dischargeable in bankruptcy. Consult an attorney before you choose bankruptcy.