Qualifying for Chapter 7 Bankruptcy if Your Income Is High

For most people, qualifying for Chapter 7 bankruptcy requires taking and passing the "means test," a somewhat complicated two-step financial evaluation (the complicated section gives high earners a chance to qualify). Filers whose gross income is too high to pass the straightforward first part proceed to the more complex part to deduct allowed expenses. However, a small percentage of filers aren't required to take it to eliminate or "discharge” debts in Chapter 7 bankruptcy.

Are You Exempt From the Chapter 7 Bankruptcy Means Test?

Not everyone has to take the means test. Business owners who are personally liable for business debts, often due to signing a personal guarantee, don't always need to take it. They're exempt if their debts are primarily business, not "consumer" or household debts. Ask your bankruptcy lawyer whether your state evaluates the amount owed or the number of each type to determine whether your business debts exceed your consumer obligations.

Also, some military members and disabled individuals are exempt from taking the means test (more below). If you might be exempt, consider reading the qualifications on the exemption form.

Passing the Chapter 7 Means Test

The simplest way to pass is by showing that your gross income is less than the state median income for your family size. You can check by doubling your family's gross earnings for the last six months and comparing the result to the Census Bureau Median Family Income by Family Size amounts listed on the U.S. Trustee Program website.

If you fail the first portion because your gross income exceeds the allowed amounts, you can take the second part of the means test and deduct actual and predetermined expenses from your gross income. If the “disposable income” amount isn't enough to make reasonable creditor payments through Chapter 13, you will qualify for Chapter 7.

If you have enough disposable income to pay creditors through a Chapter 13 plan, you won't qualify for Chapter 7. The court will likely convert the Chapter 7 case to Chapter 13.

Help for High-Income Means Test Takers

When completing the Chapter 7 means test, keep in mind the following hints that have helped others pass it:

• Some states' median income is significantly higher than others.
• The number of dependents matters because the state median income increases depending on household size.
• You’ll be exempt from the means test if your debts are primarily business, not consumer. For instance, mortgages, rent, and daily food expenses are consumer debts. Business tax debts are not. Other business debts include credit card and personal loan debts used to buy equipment, computers, furniture, supplies, and inventory for your business. Individual income tax and student loan debt might be considered business debt, but you'll want to check with your local bankruptcy lawyer. Learn more about small businesses in bankruptcy.
• Disabled veterans who incurred debt primarily when on active duty or performing a “homeland defense activity” are exempt.
• A military reserve or National Guard member on active duty or active duty within the last 540 days is exempt.
• Ongoing secured debt payments, such as mortgages and car payments, are deducted under Part Two of the means test, reducing the disposable income available to pay other creditors in Chapter 13. However, secured debt payments must be reasonable and not overly high.
• In Part Two of the means test, you’ll deduct overdue payments on a mortgage, car loan, attorney fees, or other secured property, reducing the disposable income available to pay other creditors in Chapter 13.
• Priority debt, such as back child support or back taxes, is deducted in Part Two of the means test, reducing the disposable income available to pay other creditors in Chapter 13.

How the Chapter 7 Means Test Impacts Chapter 13 Qualifications

The last three criteria calculate amounts you must fully pay in Chapter 13—and this calculation matters. If the allowed expenses consume all or most of your disposable income, you wouldn’t have enough remaining to make a reasonable monthly Chapter 13 payment to the lowest priority of creditors—those holding credit card balances, medical bills, personal loans, and the like. In that situation, you would qualify for a Chapter 7 discharge even if your overall income was high.

Why Your Current Budget Might Disqualify You

Passing the Chapter 7 means test isn't enough to qualify for a Chapter 7 debt discharge because it considers only past earnings and allowed expenses. The trustee and court will also examine your current earnings and actual expenses that you disclose on Schedules I and J of the bankruptcy forms. If the schedules show you have enough disposable income to fund a Chapter 13 plan, you won't qualify for Chapter 7.

If you'd like to know how much you'd pay in Chapter 13, a Chapter 13 payment calculator can help.

Consult a Bankruptcy Lawyer

If your income prevents you from filing for Chapter 7 bankruptcy, Chapter 13 bankruptcy might be an option. But it isn't a guarantee. It's not uncommon for someone's income to be too high for Chapter 7 but insufficient to pay for everything required in Chapter 13. A bankruptcy lawyer can best explain your bankruptcy options, and many offer a free initial consultation.