Making a significant income won't stop you from filing for bankruptcy. Still, it might determine whether you must file for Chapter 7 or Chapter 13 to wipe out qualifying debt. Your ability to file a particular chapter will depend on your income and, in some cases, your deductible expenses.
Most people want to file Chapter 7 because it wipes out most unsecured debt, such as credit card accounts, utility balances, and medical bills, without requiring monthly payments to creditors for three to five years. However, not everyone qualifies for a Chapter 7 discharge, the order that wipes out qualifying debt.
To determine whether you qualify, you must pass the two-step means test. The means test measures your ability to pay some amount toward your debt through a Chapter 13 plan. Although it would be challenging to pass the first part while making considerable money, it can happen if you have a large family. Otherwise, you'll have a better chance of passing the second part of the means test.
The reason you'll likely fail the first part of the Chapter 7 means test if you make a lot of money is because it compares your family's gross income to your state's median income for the same household size. If you have a small to moderate family size, you're not going to get a break.
However, if you fail the first part, you'll deduct expenses in the second part, and if your expenses are high enough, you'll pass. But you shouldn't assume you'll pass the second part with flying colors if you struggle to pay your monthly expenses. Bankruptcy law doesn't support lavish lifestyles, so many monthly expenses are limited to reflect regional and national averages.
Typically, people with high incomes who qualify for Chapter 7 bankruptcy have significant balances of "priority" debt, which, in many cases, isn't dischargeable in bankruptcy. The most common are tax debts and domestic support arrearages. Other obligations that help high earners pass the means test include mortgages, car loans, and late payments of the same. Tuition, mandatory payroll deductions like union dues, and court-ordered payments can also help.
Also, if you owe more business obligations than consumer debts, perhaps because of a failing business, you'll be exempt from taking the means test. And in some jurisdictions, taxes and student loans are considered business debt. Learn about the differences between business and consumer debts.
Below are select income and expense issues that might help you qualify for Chapter 7 bankruptcy.
The first part of the means determines whether your family income is less than the median family income of your state. If it is, you automatically qualify and don't have to complete the second portion.
You can find the most recent figures on the U.S. Trustee's website by selecting "Mean Testing Information" on the left. You'll notice that the limits increase depending on your family members, making passing easier if you support a significant number of people. The amounts also differ dramatically by state, as illustrated in the following examples:
Example 1. Derik has a household of four people, including himself, a spouse, and two children. They live together in New Jersey. In 2023, Derik could have a household income of up to $155,510 and qualify for Chapter 7 bankruptcy without taking the second part of the means test.
Example 2. Kirsten lives in Alabama and also has four people in her household. In 2023, Kirsten's gross family income could be as high as $94,659 for qualification purposes.
Find out more about comparing your income to the state median.
Even if your family income exceeds your state's median income, you have another chance to meet qualification requirements. You can subtract some actual and predetermined expenses from your income.
If the amount remaining or your "disposable income" is insufficient to fund a Chapter 13 repayment plan, you'll qualify for Chapter 7 bankruptcy. Although the figures change periodically, as of October 13, 2023, the monthly disposable income times 60 could not exceed $15,150.
Deductible expenses include the following:
You'll want to prove you can prove all claimed expenses. Be sure you have receipts before claiming expenses to help you pass the means test.
If you don't pass the means test, you might qualify to reorganize your debt under Chapter 13 bankruptcy (or Chapter 11 bankruptcy if your expenses exceed the allowed amounts). In Chapter 13, you'll pay into a three- to five-year repayment plan. After completion, the bankruptcy court will discharge most remaining unsecured debt balances.
There's no limit to the amount you earn in Chapter 13 bankruptcy. However, it's relatively common not to make enough to pay all required expenses.
For instance, you must repay all recent back taxes, domestic support obligations, and any arrearages on your home and car loan if you want to keep the property. These amounts are in addition to your monthly expenses and house and car payments.
Find out whether you're eligible for Chapter 13 bankruptcy.
Each bankruptcy chapter offers different benefits that help solve distinct financial problems. So, you'll want to consider more than the money you make when deciding which bankruptcy chapter will work for you.
For instance, here are a few examples of issues that might make filing for Chapter 13 bankruptcy a better option than a Chapter 7 case:
Keep in mind that each person's case is unique. An easy way to determine the most advantageous approach is to meet with a knowledgeable bankruptcy attorney.
Did you know Nolo has made the law accessible for over fifty years? It's true, and we want to ensure you find what you need. Below, you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
Updated October 13, 2023