Filing bankruptcy for above median income debtors (high earners) is challenging which is why you need a skilled attorney who specializes in bankruptcy. High income earners are often told they do not qualify for chapter 7 by other attorneys. You should always seek a second opinion when told that you do not qualify for chapter 7. Some attorneys do not specialize in bankruptcy and therefore have not mastered all the nuances of practicing bankruptcy law. Other attorneys will tell you that you don’t qualify for a chapter 7 so they can put you in a chapter 13. The legal fees in a chapter 13 are about four times higher than a chapter 7.
It is possible for above median earners to qualify for chapter 7. One of the easiest ways to get around the income requirements is the debt classification. The bankruptcy petition asks debtors to classify their debts as primarily consumer or business related. If your debts are primarily business related (over 50%), you are exempted from the income requirements. An attorney can help you qualify which debts are business debts. The basic definition of a consumer debt as defined by the bankruptcy code is, “obligation incurred primarily for personal, household or family use.” US Bankruptcy Code 11 USC § 707.
Assuming a higher income earner’s debt are primarly consumer debts, they may still qualify by completing the long form version of the chapter 7 means test. Like it sounds, the test measures your means (ability) to pay a portion or all of your debts back. Congress enacted the means test in 2005 as a way to push more high income earners into chapter 13 repayment plans. A chapter 13 requires a debtor to pay a portion of their debts back over three to five years. The long form of the means test is quite complex. It takes many years to fully master this form. Federal and Local rules come into play.
The basics of the long form (B22A Part II) are as follows: 1) It takes the average of the debtor’s last 6 months of income. From this average monthly income, the debtor may deduct their expenses. 2) The form allows the debtor to deduct payroll expenses such as medical and retirement premiums. 3) It allows for tax deductions which should match the debtor’s actual tax obligation not the amount that is actually deducted – many debtors overpay taxes during the year. 3) The means test form allows the debtor to deduct certain actual expenses such as mortgages (with exceptions), child care, alimony, auto loans, property taxes, insurance and HOA fees 4) The means test uses IRS local standards for certain household expenses such as food, utilities and transportation.
Once the form is completed, the bankruptcy means test shows the amount of monthly disposable income the debtor has to repay debts. If the debtor does not have adequate disposable income, they may qualify for a chapter 7.
If you are a higher income earner but you are struggling with debt repayments, contact a bankruptcy law attorney who has successfully represented high income earners in chapter 7 bankruptcy. The attorney should know how to maximize the allowed deductions on the form to your benefit. In the event the attorney advises you that you do not qualify, make sure the attorney carefully reviews the means test form with you and consider getting a second opinion.