Higher Income Earners and Bankruptcy
There is sometimes a misconception that bankruptcy is only available to people with little or no income, such as individuals who are unemployed. This is simply not true. Anyone whose debts exceed their ability to repay can seek bankruptcy protection. This includes many people who are considered “higher income earners.” And while your income does not disqualify you from bankruptcy, it can dictate what type of filing you are allowed to make.
Chapter 7 Liquidation vs. Chapter 13 Repayment
Individual debtors normally file for either Chapter 7 or Chapter 13 bankruptcy. Chapter 7 is a quicker process. It involves liquidating any assets the debtor owns that is not exempt from the bankruptcy process. In many cases, there is no non-exempt property, so the debtor simply walks away with a court-ordered discharge of their debts.
In 2005, however, Congress amended Chapter 7 to require a “means test.” Basically, this test looks at your current monthly income and compares it to a statewide median-income level. If your income–less certain permitted deductions–exceeds this median level, then you cannot file for Chapter 7
Instead, you must file for Chapter 13. While there is no means test for this type of bankruptcy, it is also a much slower process than Chapter 7. Under Chapter 13, you are required to submit a repayment plan to ensure your creditors are repaid over a period of 3 to 5 years. Of course, Chapter 13 assumes you have sufficient disposable income to actually make monthly payments.
What Does the Means Text Exclude?
So is it possible to have a high income and still pass the Chapter 7 means test? Yes. First, the median income is adjusted annually and takes into account the size of your household. Let’s say you and your spouse have two children. Under the current means test applicable to Florida residents, your annual income can be as high as $82,560 and still qualify you for Chapter 7.
And keep in mind, certain expenses can be deducted from your gross income before it is compared to the median level. In particular, any ongoing payments you currently make on secured debts–e.g., your home mortgage or car loan–are permitted deductions. Therefore, if most of your debt is secured in this manner, you can theoretically earn a lot but still have insufficient disposable income to meet the requirements of a Chapter 13 repayment plan.
Also note that the Chapter 7 means test only applies to individuals seeking to discharge “consumer debts” in bankruptcy. Business debts are exempt from the means test. In other words, if you are self-employed and the majority of your debt is related to your business, as opposed to personal consumer debts, you may be able to file for Chapter 7 regardless of your income level.
Get Advice from a Florida Bankruptcy Attorney
Regardless of whether you end up filing for Chapter 7 or Chapter 13 bankruptcy, you should not enter the process without first seeking competent legal advice. An experienced West Palm Beach bankruptcy lawyer can review your financial situation and advise you on the best course of action. Contact the offices of Kelley, Fulton & Kaplan today at 561-264-6850 to schedule a consultation with a member of our bankruptcy team.