Can I qualify for chapter 7 bankruptcy with high income?

Much has been written about the means test since it was enacted as part of the 2005 amendments to the Bankruptcy Code, also known as the BAPCPA. For an excellent explanation of what the means test is, see Lori Patton’s recent contribution: Does Failure to Pass the Means Test Automatically Cut Off Chapter 7 Eligibility?

Despite the fact that it is frequently written about, the mean test’s application is often poorly understood by individuals who are considering bankruptcy, and in some cases even by bankruptcy attorneys.  This may be, in part, because the means test is not a problem in most bankruptcy cases; according to one report, 94% of the people filing for bankruptcy had incomes below their state’s median income; the means test was simply not an issue in those cases.

The current economic downturn may be altering this trend.  Recent conversations we have had with potential clients suggest that many households are going through rapid and extreme financial changes.  This has left many families and individuals in a gray area where their six-month average income is above their state median (triggering application of the means test), but they clearly need some kind of help due to a recent job loss, business failure, health problem (perhaps coupled with a loss of insurance secondary to a job loss), or other issue.

In some cases a thorough understanding of the “long form” means test (a term that I have borrowed from Ms. Patton’s aforementioned article) can be the key to getting these individuals the protection they need under Chapter 7.

Assuming your six-month average income is above the median, “long form” means testing directs you to a section entitled “Calculation of Deductions Allowed Under § 707(b)(2).”  This section consists of several subparts, described in more detiail here.

Subpart A (deductions under standards of the Internal Revenue Service) calculates what the local expenses would be for a household of a particular size, as determined by the IRS.  These deductions are not based on the debtor’s actual expenses but rather, are based upon tables which are periodically updated by the government (as I discussed here).

Next, Subpart B (entitled “Additional Expense Deductions under § 707(b)”) deals with various actual expenses for   After that, Subpart C (”Deductions for Debt Payment”) deals with required payments for secured debts and priority debts (debts that are not secured, but important debts that are not dischargeable, such as child support and alimony payments).  Finally, debtors who fail the “long form” means test might still qualify for Chapter 7 in light of “special circumstances” or “totality of the circumstances.”

Whether the aforementioned deductions apply to a particular case, and whether they will be sufficient to qualify a “high wage earner” (i.e., someone who is above the six-month median) for Chapter 7 can be complicated issues which should be discussed with a bankruptcy attorney in your jurisdiction.

Keep in mind that the system is not perfect, and in some cases individuals or families will not qualify for Chapter 7 even when their financial situation is dire.  As Kentucky bankruptcy lawyer John Rogers recently wrote, bankruptcy is not always the answer; sometimes people will not be eligible for Chapter 7 bankruptcy because their income was too high, yet be able to file Chapter 13 bankruptcy because they could not afford the payment required.