Can I File Bankruptcy If I Make Too Much Money?

Bankruptcy offers individuals facing overwhelming financial challenges a structured legal process to address their debts. While income is a significant factor in determining eligibility for certain types of bankruptcy, it does not automatically disqualify someone. Specific legal rules and different bankruptcy chapters exist that consider a filer’s financial situation comprehensively.

Understanding the Bankruptcy Means Test

A core mechanism for evaluating a debtor’s financial capacity in bankruptcy proceedings is the Bankruptcy Means Test. This test determines if a debtor’s income is sufficiently low to qualify for Chapter 7, which typically involves the liquidation of non-exempt assets and the discharge of most unsecured debts.

The initial step of the Means Test involves comparing a debtor’s average monthly income to the median income for a household of the same size in their state. If a debtor’s current monthly income falls below this applicable state median, they generally pass the Means Test and are presumed eligible to file for Chapter 7 bankruptcy.

However, if a debtor’s current monthly income exceeds the state’s median income for their household size, a more detailed calculation is required. This second part of the Means Test involves analyzing a debtor’s disposable income after accounting for various allowable expenses.

Calculating Your Income for the Means Test

Determining “Current Monthly Income” (CMI) is a crucial step in assessing eligibility for bankruptcy under the Means Test. CMI, as defined by 11 U.S.C. 101, represents the average monthly income received from all sources during the six full calendar months immediately preceding the bankruptcy filing. To calculate CMI, a debtor sums all relevant income received over these six months and then divides that total by six.

The types of income included in the CMI calculation are broad, encompassing nearly all money received. These include wages, salaries, tips, bonuses, overtime pay, and commissions. Net income from self-employment, business operations, or rental properties is also considered, after deducting ordinary and necessary business expenses. Other sources like regular contributions, unemployment benefits, pension and retirement income, interest, and dividends are also part of this calculation.

Conversely, certain types of income are excluded from the CMI calculation. Benefits received under the Social Security Act, such as Social Security retirement, SSDI, or SSI, are not included. Payments to victims of war crimes, crimes against humanity, or international and domestic terrorism are also excluded. Additionally, certain disability payments or allowances paid in connection with a disability, combat-related injury, or death of a uniformed service member are excluded from CMI.

Courts can consider special circumstances, such as recent reductions in income, which might affect a debtor’s actual ability to pay, even though the Means Test uses a historical six-month average. This calculation of CMI then serves as the figure compared to the state’s median income to proceed with the Means Test determination.

Navigating Chapter 7 and Chapter 13 Based on Income

The income calculated through the Means Test directly impacts eligibility for Chapter 7 bankruptcy and helps determine if Chapter 13 is a suitable alternative. If a debtor’s calculated Current Monthly Income (CMI) is below the state’s median income for their household size, they generally qualify for Chapter 7, assuming other eligibility factors are met. Chapter 7 allows for the discharge of most unsecured debts, providing a fresh financial start.

However, if the calculated CMI is above the state’s median income, the Means Test proceeds to a second step. This involves deducting allowable expenses from the debtor’s income, including living expenses, secured debt payments, and other necessary expenditures. These deductions determine a debtor’s “disposable income.” If, after these deductions, the remaining disposable income is below a specific dollar threshold or insufficient to pay a certain percentage of unsecured non-priority debts over a typical five-year period, the “presumption of abuse” for Chapter 7 may be overcome.

If the presumption of abuse is not overcome, meaning the debtor has sufficient disposable income to repay a portion of their debts, they typically cannot file under Chapter 7. In such cases, Chapter 13 bankruptcy often becomes the alternative. Chapter 13 is designed for individuals with regular income who can fund a repayment plan over a period of three to five years. This plan uses the debtor’s disposable income to make payments to creditors, allowing them to retain assets that might otherwise be liquidated in a Chapter 7 case.

Chapter 13 has its own income requirements, necessitating a “regular income” stable enough to make plan payments. This income can come from various sources, including wages, self-employment, or passive income. Chapter 13 also has specific debt limits for both secured and unsecured debts; exceeding them prevents filing under Chapter 13.

Exemptions from the Means Test

While the Means Test is a standard component of Chapter 7 eligibility, specific situations allow debtors to bypass this assessment, regardless of their income level. One exemption applies to debtors whose obligations are primarily “non-consumer debts.” Consumer debts are defined as those incurred for personal, family, or household purposes, such as credit cards or personal auto loans. If more than 50% of a debtor’s total debt is classified as non-consumer or business debt (incurred with a profit motive), they are exempt from the Means Test. This can include debts for business operations, investment properties, or tort claims.

Another exemption from the Means Test applies to certain disabled veterans. Under 11 U.S.C. 707, a disabled veteran may be exempt if their indebtedness was incurred primarily while on active duty or performing a homeland defense activity. To qualify, the veteran must have a disability rating of at least 30% or have been discharged from active duty due to a service-incurred disability.

Certain military reservists and National Guard members called to active duty may also qualify for a Means Test exemption. If they served for at least 90 days, the exemption can apply during their term of duty and for 540 days thereafter. Even if a debtor qualifies for one of these exemptions, other Chapter 7 eligibility requirements still apply.