Making a significant income won’t stop you from filing for bankruptcy—but it might determine under which bankruptcy chapter—Chapter 7 or Chapter 13—you can 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 this type of bankruptcy because it wipes out most unsecured debt, such as credit card accounts, utility balances, and medical bills, without requiring the debtor (filer) to make a monthly payment to creditors for three to five years.
However, not everyone meets the requirements of the Chapter 7 discharge (the order that wipes out qualifying debt). You must pass the two-step means test. Even so, it’s possible to pass either part while making a considerable amount of money.
The first part asks whether your family income is less than the median family income of your state. If it is, then you automatically qualify, and you don’t have to complete the second portion.
(The family income figures change periodically. You can find the most recent figures on the U.S. Trustee’s website by selecting “Mean Testing Information” on the left side.)
If your income is high, you can pass the first portion if you support a significant amount of people.
Example 1. Derik has six people in his household—a spouse and four children—and they all live together in New Jersey. As of May 1, 2017, Derik could have a household income of up to $131,686 and qualify for Chapter 7 bankruptcy without taking the second part of the means test.
Example 2. Kirsten lives in Alabama and has six people in her household. As of May 1, 2017, Kirsten’s family income could be as high as $87,740 for qualification purposes, before deducting expenses.
(For more information, read Household Size and the Chapter 7 Means Test.)
Even if your family income exceeds your state’s median income, you have another chance to meet qualification requirements. You’ll be able to subtract certain expenses—some actual, others predetermined—from your income. If the amount remaining (called your disposable income) is insufficient to fund a Chapter 13 repayment plan, you’ll qualify for Chapter 7 bankruptcy. (The figure changes periodically, but as of May 1, 2017, the monthly disposable income times 60 could not exceed $12,850.)
Deductible expenses include:
You’ll want to be sure that you can provide proof of any and all claimed expenses. To find out if you’d qualify for Chapter 7 bankruptcy, start by reading Completing the Chapter 7 Means Test Calculation (Form 122A-2).
If you don’t pass the means test, it’s likely that you’ll be able to reorganize your debt under Chapter 13 bankruptcy (or Chapter 11 bankruptcy, in some cases). In this chapter, you’ll pay your disposable income into a three- to five-year repayment plan. After it’s complete, the court will discharge most remaining unsecured debt balances.
Each bankruptcy chapter offers different benefits that help solve distinct financial problems. So, you’ll want to consider more than the amount of money that you make when deciding which form of bankruptcy is right 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.