Having a high income does not always mean that you cannot file for Chapter 7 bankruptcy in Pennsylvania. Nonetheless, many people assume incorrectly that if their income is relatively high, they cannot filer bankruptcy. In fact, I have successfully represented clients with household incomes well above $100,000 in Chapter 7 cases in my Philadelphia bankruptcy practice. However, there are things that high-income debtors need to know before attempting to file under Chapter 7.
What constitutes a high income depends on several 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 further than the same earnings in the city center of Philadelphia. ) That being said, you are a "high-income debtor" for bankruptcy purposes if your household earnings are above the state median income for your family size.
"Household income" is your income from all sources, including your spouse's income. You must include your spouse's income, even if you plan to file individually. There are certain types of income that may not count, which we will discuss below.
The bankruptcy court uses U.S. Census Bureau data to determine the Pennsylvania state median income by family size. As of the date of this post, the Pennsylvania state median income is as follows:
Good news. If your average household 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 all other requirements).
Not necessarily. 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. Frequently, the results allow a debtors with substantial earnings to file under Chapter 7.
The means test looks at your income after taking out allowable expenses. Some types of income may be excluded from the means test. (See below.) If your income minus expenses is below the median income, you have passed the test. Passing the means test means that you may file under Chapter 7 (if you meet all other requirements). For a detailed explanation of the means test, see my post: "The Bankruptcy Means Test: An Attorney's Explanation."
Before jumping to the means test, debtors need to determine if they are 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, family size is one of the critical factors determining whether you are a high-income debtor.
Example: A family of four making $115,000 would have earnings well above the state median of $103,316 for their family size. (See the chart above.) But what if that family making $115,000 includes six members, 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.
If you must take the means test, don't panic. High-income debtors often have high allowable expenses, including mortgage payments, car payments, income taxes, etc., that will substantially offset their earnings. Although the means test is complex and requires care, it is not unusual for high-income debtors to pass the test. However, it is essential to retain an attorney who understands the test and has represented high-income debtors. Attention to detail is the name of the game.
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.
Social Security Income. The Bankruptcy Code excludes Social Security benefits from your gross income on the means test. (For more see my post on Senior Citizen Bankruptcy.) This exclusion will often bring a debtor's overall gross earnings below the state median, thus avoiding the means test.
Irregular Income. Because the Bankruptcy Code focuses on "regular income," you may be able to argue that some irregular earnings do not count as "gross income." However, you must be careful to disclose all income.
Business Expenses. Business income counts towards the means test, but you can and should deduct your business expenses. (Be sure to maintain careful income and expense statements.)
Pension and 401k Withdraws. Withdraws from 401(k)s and other debtor-owned retirement accounts do not typically count as income for the means test. However, there are exceptions. Regular pension benefit payments generally do count as income.
In cases when there are irregular earnings (such as 401k withdrawals, family gifts, etc.), calculating gross earnings can be complicated. Experienced bankruptcy attorneys are used to dealing with such situations.
The bankruptcy code and other statutes have carved out some exceptions to the means test. For example:
The Business Debt 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 well-documented. If you have used a credit account or bank account for business and personal use, you must separate the business charges from the personal charges.
The Military Service Exception. Under the bankruptcy code, disabled veterans, active-duty military, and national guard and reservists are exempt from the means test under certain circumstances. See our blog post on servicemembers' protections and our military bankruptcy page for more details.
Congratulations. You have surmounted the biggest obstacle to filing under Chapter 7. However, it is important to note that even if you pass or avoid the means test, you do not automatically get to stay in Chapter 7. You must meet all other requirements. An experienced attorney can ensure that you meet these requirements before filing.
In some cases, another non-bankruptcy option such as debt settlement, debtor defense, foreclosure defense, mortgage modification, etc. may be a better solution. Discussing your options with a Pennsylvania bankruptcy lawyer can help you sort out what type of debt relief will work best for your financial situation.