It is not by any means unusual for a “high-income” debtor to file under Chapter 7. Nonetheless, many people assume that if their income is relatively high, they cannot file for Chapter 7 bankruptcy. Often this assumption is incorrect. In fact, I have successfully represented clients with household incomes above $100,000 in Chapter 7 proceedings.
When is high really “high”?
What constitutes a high income is a matter of perspective and depends on many factors, such as where you live, your living expenses, the size of your family, etc. (A salary of $90,000 for a family in rural Pennsylvania goes a lot farther than the same earnings in the city center of Philadelphia. ) That being said, in the language of bankruptcy attorneys a “high-income debtor” is a debtor with earnings above the state median for the debtor’s family size.
Family of 2: $67,540
Family of 3: $83,868
Family of 4: $103,316
Family of 5: $109,316
Family of 6: $118,316
Why is the state median important?
Whether your income is above or below the Pennsylvania state median determines if you will be able to discharge all or most of your debts in Chapter 7, or you will be required to pay back at least a portion of your debt under Chapter 13. If your average gross earnings for the six months before filing for bankruptcy is at or below the state median for your family size, you may file under Chapter 7 (assuming you meet the other requirements). Simple.
On the other hand, if your average gross earnings for the six months before filing is over the median, you will have to take a “means test” to determine if you qualify for Chapter 7. The means test considers your income minus certain allowable expenses. Frequently, the results allow a debtor with substantial earnings but high expenses to file under Chapter 7. (For more on the means test and related topics, visit my Bankruptcy FAQ.)
Are you really a high-income debtor?
Before jumping to the means test, debtors need to determine if they are in fact high-income debtors for the purposes of the test. I often have clients with seemingly high earnings who are surprised that they fall below the state median. Many of these clients have not considered the size of their families. However, one of the most important factors in determining whether or not you are a high-income debtor is family size. For example, a family of four making $115,000 would have earnings well above the state median of $100,078 for their family size. (See the chart above.) But what if that family making $115,000 includes six members, e.g., the parents and their four children)? Because the state median for a family of six is $118,078, the debtors do not have to take the means test.
Even if the debtor is over the state median, it is often by much less than the debtor presumed. The closer your overall earnings are to the state median, the easier it is to pass the mean’s test.
What type of income?
If you appear to be over the median, you may still be able to avoid the means test, depending on what type of earnings you have. Not all sources of money count as income for calculating gross earnings. For example, under the Bankruptcy Code certain income, primarily Social Security, is excluded from your gross income for the purposes of the means test. (For more see my post on Senior Citizen Bankruptcy.) This exclusion will often bring a debtor’s gross earnings below the state median, thus avoiding the means test. Also, because the Bankruptcy Code focuses on “regular income,” some irregular earnings may not count as “gross income.”
The Business Debt Exception.
For people in business, there is an important exception. If more than 50% of your debts are business-related, you need not take the means test. A word of caution: all of these expenses must be business-related and documented. If you have used a credit account or bank account for both business and personal use, you must separate the business charges from the personal charges.
National Guard and Military Exception.
Under the National Guard and Reservists Debt Relief Act of 2008, active duty National Guard and Reservists are generally exempt from the means test during the time they are on active duty and for 540 days after they return from active duty.
In many cases, particularly where there is a business or irregular earnings (such as 401k withdrawals, family gifts, etc.), calculating gross earnings can be a complex task. Nonetheless, these exclusions and exceptions have helped many a debtor avoid Chapter 13.
Can I pass the test?
In sum, even if you must take the means test, it is still quite possible that you will qualify for Chapter 7. Very often, high-income debtors have high allowable expenses, including mortgage payments, car payments, etc., that will offset their earnings. Although the means test is complex and must be handled carefully, it is not at all unusual for high-income debtors to pass the test. However, failing to list income of any kind can lead to unpleasant consequences. Attention to detail is the name of the game.
We have spent most of our time discussing the initial qualification for Chapter 7. However, it is important to note that even if you pass or avoid the means test, you do not automatically get to file under Chapter 7. You must meet all other requirements, including a showing that, after expenses, you have no significant disposable income to pay your creditors. Also, there may be a reason for choosing Chapter 13, such as saving a house from foreclosure or a car from repossession. In some cases, a non-bankruptcy solution such as debt negotiation may be a better solution. Discussing your options with a Pennsylvania bankruptcy lawyer can help you sort out what type of debt relief is appropriate in your case.