Do I Make Too Much Money to File Bankruptcy?

money saved through bankruptcy

 

Since the Bankruptcy Code was amended back in 2005, many people are unsure if they qualify to get rid of their debts by filing a Chapter 7 Bankruptcy case.  A Chapter 7 Bankruptcy is also known as a “Fresh Start” bankruptcy because it discharges all unsecured debts such as credit card debts, medical and legal bills, and personal loans, allowing the debtor to start over with a clean slate.

Actually, the new Bankruptcy laws* didn’t change things for most people who are seeking bankruptcy relief to discharge unsecured debts such as credit cards, medical bills and personal loans.   There is a Means Test based on average income over the six months before the case is filed.   However, since unemployment (or under-employment) is often one of the reasons for needing debt relief, most people pass the means test in the first stage because they have earned less than the state median for their family size.

In California, the current income limit in the first stage of the means test for one earner, with no dependents, is $3,983 gross per month. (This is published by the Census Bureau as $47,798 gross per year.)**

For a two-person family, the limit is $5,167 gross per month; with three people in the family, it is $5,552, and with four people, $6,259 gross monthly. (Add $675 for each additional family member.)**

Obviously, if you earned higher than the above limits in the past but recently experienced or are about to experience a loss in income, simply waiting a month or two (or more) might solve your problem, as your average gross income may drop low enough so that you pass the test.

But even if you do not pass the initial stage of the test because your gross income is higher than the above limits, you may still pass the means test depending on allowable deductions such as home expenses, automobile expenses, telecommunications expenses, medical bills,  education expenses for a special needs child, and many other allowable expenses.  It is worth consulting an experienced bankruptcy attorney to see which allowable deductions you may be entitled to claim.

There are two groups of people who do not have to undergo the means test at all:
(1) Business debtors, that is, people whose debts are “not primarily consumer debts,” and
(2) Disabled Veterans whose debts were incurred primarily while on active duty or while performing homeland defense activity.
If you fall under one of these two exceptions, you can earn more than the above limits and still obtain the Chapter 7 discharge of debts.

If you exceed the above income limits, and you cannot file under Chapter 7, you may still get benefits from the Bankruptcy Code by filing a Chapter 13 Bankruptcy case, in which you create a Payment Plan to pay all or a portion of your debts.

Even if you can pass the Means test, there may be other reasons that you may choose to file a Chapter 13 case.  For example, you may be behind on payments on secured loans such as a home loan or a car loan.  (“Secured” means that the creditor can take your property if you fall behind on payments.)  In that situation, you will need to file a Chapter 13 case to create a Payment Plan to catch up on those payments and keep the house or the car, or both.

If you would like to read about Chapter 13 Bankruptcy, see my blog post:  Should I file a Chapter 13 Bankruptcy?
* BAPCPA = Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

** These income limits change periodically, so check with me to see if there has been a change. The above limits are effective beginning November 15, 2013.  I will try to keep this post updated when there is a change.

6 Responses to Do I Make Too Much Money to File Bankruptcy?
  1. Ed & Angie
    August 3, 2011 | 10:36 pm

    If you need help for a fresh start, Attorney James Michel will definitely help you.

  2. […] if you cannot pass the Means Test discussed in my previous blog post, Do I Make Too Much Money to File a Chapter 7 Bankruptcy?, and a Chapter 7 filing is not available, you may still be able to get a partial discharge by […]

  3. […] can pass the Means Test (as discussed in my previous blog post, “Do I Make Too Much Money to File a Chapter 7 Bankruptcy?,”), AND […]

  4. […] debt in the U.S.; we are only talking about people who are able to get bankruptcy relief under a Fresh Start (Chapter 7) Bankruptcy, or an Individual Repayment Plan (Chapter 13), in which the borrower is eligible pay back part of […]

  5. Nick
    November 4, 2011 | 12:32 pm

    Jim, this is very helpful. Great blog setup also. Nice to reconnect. Come visit us. First snow is falling. (We’re at 6500′.) All Best, -Nick

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