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.
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.
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. If your income is too high for Chapter 7, you can still file under Chapter 13, but you will have to pay back a portion of your debts over time. Thus, Chapter 7 is often a better option. 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).
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.
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.
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 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.
Just because you are over the state median does not mean that the game is over. You can still take and possibly pass the means test. Even when debtors are 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 means test. For more on the means test, see our attorney's explanation.
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. Under the Bankruptcy Code, Social Security, is excluded 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 401ks and debtor-owned retirement accounts are not typically counted as income for the purposes of the means test. However, there are exceptions. Regular pension benefit payments generally do count as income
In many cases, particularly when there are irregular earnings (such as 401k withdrawals, family gifts, etc.), calculating gross earnings can be a complex task. Experienced bankruptcy attorneys are used to dealing with such situations.
The bankruptcy code and other statutes have carved out some exception to the means test. For example:
The Business Income 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 both 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.
In sum, even if you must take the means test, it is still possible to qualify for Chapter 7. high-income debtors often 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 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.
Also, there may be a reason for choosing Chapter 13, such as stopping a foreclosure, saving car from repossession, or protecting nonexempt assets. In some cases, a non-bankruptcy solution such as debt settlement 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 you.