Since the last major revision to the Bankruptcy Code in 2005, more consumer debtors are finding that they "make too much" to file for Chapter 7 relief. But, what is too much? There are a number of factors to look at with regard to income in Chapter 7 and if in doubt, always seek counsel from an experienced bankruptcy attorney.
Consumer versus Non-Consumer Debt
The first thing that dictates how much you can make and still file for Chapter 7 bankruptcy relief really doesn't have anything to do with your income; rather, it has to do with the nature of your debt. The bankruptcy code classifies debt as either "consumer" or "business" debt also known as "non-consumer" debt. Consumer debts are defined under the bankruptcy code as obligations "incurred by an individual primarily for a personal, family or household purpose." This would include credit cards, medical bills, and the like. A non-consumer debt, or business debt, would include taxes, business investment and expenses, tort claims, real estate investment for non-personal use and the like. Now, if your debt is 51% or more consumer debt, you have to "pass" the Means Test (discussed below). If your debt is 51% or more business debt, there is no further inquiry into how much you make. The only issue at that point is that you are doing the bankruptcy in "good faith."
Some jursidictions have come down with decisions in non-consumer cases that do look at disposable income to measure good faith (do you have the ability to pay back at least some of your debt?). Federal courts across the nation are split on the issue. Some courts have decided that disposable income is not relevant in your ability to repay creditors when you have primarily business debts (mostly courts in the Western states) whereas others (mostly courts scattered throughout the midwest, Missouri, Michigan, etc.) do look at your disposable income to determine you ability to repay non-consumer debts.
So, in short, can you make a million dollars a year and file for Chapter 7 bankruptcy when 51% or more of your debt is business or non-consumer debt? Depending on where you live, the answer could be yes, or it could be maybe. If the debt is consumer, the answer is definitive: no.
Consumer debt and the "Means Test"
If 51% of your debt or more is consumer debt, you are subject to the Chapter 7 Statement of Current Monthly Income and Means Test Calculation more commonly known as simply the "Means Test." Introduced to the bankruptcy code in 2005, the Means Test can be complicated - even many lawyers don't understand parts of it and every provision of it is subject to daily litigation in bankruptcy courts across the nation. Essentially, you have to list all of your gross income (excluding benefits derived from social security and other classified categories) and if your income exceeds a "median income" set by the IRS for your household size in the state in which you live, you have to take line by line deductions of allowable expenditures to determine if you have sufficient disposasble income to pay your creditors. If you have a meaningful amount of disposable income, you cannot file for Chapter 7 and may consider a repayment plan via Chapter 13 bankruptcy.
Putting the Means Test into Play: An Example
In Indiana, the median household income for one earner/one individual is $39,987 (cases filed after 11/01/11 to date). If you make less than that amount, even a penny less, you qualify for Chapter 7 relief with no further inquiry as to ability or means so long as your allowable expenditures eat up most, if not all, of your income. If you make a penny more than that amount, then you are subject to further means test analysis regarding your living expenses, healthcare, support, secured debts, etc. The more you make over that mark for your household size, the more difficult it will likely be to show that you do not have disposable income to pay creditors. Can you make $75,000 a year and file Chapter 7 bankruptcy in Indiana for a household of one? It is possible, but the means test decides based on your unique situation and if it's close, it may be a battle that you take against the bankruptcy Trustee before the judge to hash it out.
The Indianapolis Bankruptcy Law Office of Eric C. Lewis is a consumer rights firm dedicated to helping honest, hard-working people handle debt, primarily through bankruptcy relief, to get back on financial track, reboot their credit and get a fresh financial start.
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