Facing overwhelming debt can be an incredibly stressful experience, and for many struggling borrowers, filing for bankruptcy may seem like the only viable option to regain financial stability. This situation is especially common today, as millions of households grapple with high credit card balances, rising living costs, and persistently elevated interest rates. These factors have contributed to an uptick in personal bankruptcy inquiries, reflecting the widespread difficulty many Americans face in managing their debt obligations.
Among the types of bankruptcy available, Chapter 7 is often viewed as the most straightforward way to eliminate unsecured debts such as credit card balances, medical bills, and personal loans. However, not everyone qualifies for Chapter 7 bankruptcy. This form of bankruptcy is specifically designed for individuals who genuinely cannot afford to repay their debts. To determine eligibility, courts assess a borrower’s income, household size, and living expenses. If a person's income is deemed too high, they may be directed toward Chapter 13 bankruptcy instead, which requires repayment of at least a portion of the debt through a structured payment plan.
Understanding who qualifies for Chapter 7 bankruptcy involves more than simply looking at a fixed income threshold. The eligibility criteria revolve around the “means test,” a two-step process used to evaluate whether a debtor’s income is sufficiently low to justify the discharge of debts under Chapter 7. This test compares your income to the median income for a household of your size in your state and considers your allowable expenses.
The first step in the means test examines your average monthly income over the past six months. This includes wages, bonuses, rental income, and other sources but excludes Social Security benefits. This monthly figure is annualized by multiplying by 12 to establish your current yearly income. This total is then compared against the median income for your state and household size. These median income levels vary significantly across states and are updated regularly. For example, in 2025, a single person’s median income in Alabama is approximately $60,786, while in California it is closer to $76,190. For a family of four, the median income in Texas is about $110,719, whereas in Connecticut it reaches roughly $159,767.
If your income falls below your state’s median income for a household your size, you typically pass the means test automatically and can file for Chapter 7 bankruptcy. However, if your income exceeds this median, it doesn’t immediately disqualify you. Instead, you proceed to the second stage of the means test, where your allowable expenses are subtracted from your income. These expenses include mortgage or rent payments, vehicle payments, taxes, health insurance, and other necessary living costs as defined by IRS standards. If, after deducting these expenses, your disposable income is still low enough, you may still qualify for Chapter 7 bankruptcy.
For those whose income is too high to pass the means test, filing for Chapter 7 bankruptcy may not be an option, but there are alternative paths to managing debt. One such option is Chapter 13 bankruptcy, which involves a repayment plan where you pay back some or all of your debts over three to five years. While this route allows you to keep your assets and avoid some of the harsher impacts of Chapter 7, it requires a commitment to a long-term repayment plan.
Beyond bankruptcy, there are other debt relief strategies that can help borrowers regain control of their finances without resorting to court proceedings or public filings. Debt settlement programs are one such alternative, particularly suitable for those struggling with unsecured debts like credit cards and medical bills. In a debt settlement program, a debt relief company negotiates with creditors to reduce the overall debt owed, often by 30% to 50%. This reduction can make it more manageable to pay off debts. Unlike bankruptcy, debt settlement doesn’t involve public disclosure or asset forfeiture, and it can often be completed more quickly—some people see their first settlements within months and finish the program in a few years.
Another viable option is enrolling in a debt management plan through a credit counseling agency. These plans help consolidate unsecured debts into a single monthly payment, frequently with reduced interest rates and fees. Although you still repay the full debt amount, the lowered rates and simplified payment schedule can make it easier to stay current on payments and avoid bankruptcy. Credit counseling agencies also provide budgeting and financial education support, which can be helpful for long-term financial health.
Both debt settlement and debt management plans offer a pathway to rebuild creditworthiness more quickly than bankruptcy. While a Chapter 7 bankruptcy