Can I File for Bankruptcy Even If I Have a Job

Yes, employed people can file for bankruptcy, and often do. Your employment income will play a role in determining whether you can file Chapter 7 bankruptcy and wipe out qualifying debt in four to six months, or whether you'll make monthly payments to your creditors for three to five years through a Chapter 13 repayment plan.

Chapter 7 Bankruptcy Income Limits

It's common for people to prefer to file for Chapter 7 bankruptcy, if possible, because there's no need to pay into an extended repayment plan. Many people who file this chapter have jobs; however, having too much income can present a problem. Your attorney will perform a calculation called the means test to determine whether you qualify for relief.

If you do qualify, you agree that in exchange for a discharge (forgiveness) of your qualifying debts, you'll get to keep (exempt) necessary property, such as clothing, household furnishings, and a modest car. You'll turn over any nonexempt property to a bankruptcy trustee who will use it to pay claims filed by your creditors.

How Much Can You Make?

You'll have to complete at least one section of a two-part qualification test called the means test. It starts by examining your family income. If your household income exceeds the median income of a like-sized family in your state, you'll have to move on to the second part of the test. If not, you qualify to receive a discharge in a Chapter 7 case, and there's no need to proceed to the next portion. (You can find the median income figures on the U.S. Trustee's website (click "Means Testing Information" in the left column).)

The second part of the test involves a more detailed means test calculation using your income, expenses, and secured debt payments. The purpose of the test is to determine whether you have enough disposable income to make a meaningful monthly payment and satisfy at least some of your debt.

You'll subtract reasonable and necessary living expenses from your income—some of which will be based on your actual monthly expenses while others will be predetermined amounts that you'll get from charts. The figure that remains after subtracting the allowed expenses from your gross income is called disposable income. If your disposable income exceeds qualification limitations, you're presumed to have enough money to pay something to your creditors, and you won't qualify for a Chapter 7 bankruptcy.

When you have unusual expenses. Most people who fail the means test will file a Chapter 13 case and spend three to five years paying that disposable income to a trustee (more below). You can choose, however, to file a Chapter 7 case despite the presumption of abuse. Your Chapter 7 trustee will probably scrutinize your means test and may file a motion to have your case dismissed or converted to Chapter 13 bankruptcy. You might be allowed to stay in a Chapter 7 case if you have special circumstances or unusual but necessary expenses that the court allows you to use in the means test calculation.

When you've been unemployed. Because the means test uses your average income during the full six months before you file the bankruptcy case, people who have been unemployed for several months before filing can usually qualify with ease.

Chapter 13 Bankruptcy Repayment Plans

In Chapter 13 bankruptcy, instead of turning over property to a trustee, you will propose a plan to pay some or all of your debts out of your future income through a three- to five-year repayment plan. Most people who file Chapter 13 can fund a monthly plan through one of the following ways:

• employment income
• business income
• Social Security or disability insurance
• pension, retirement, or annuity income
• government assistance, and
• family contributions, child support, or alimony.

The key is that the income source is regular and reliable. It's possible to use funds derived from selling your property, too, but you'll likely need to show that you have some form of steady income, as well.

(Learn more in The Chapter 13 Repayment Plan.)