Can You Make Too Much Money to File Bankruptcy?

To some, this may sound like a foolish question.  After all, why would someone need to file bankruptcy if they earn a lot of money?  Wouldn’t someone who makes a good income be abusing the system if they filed for bankruptcy?  The answer is that everything is relative.  It really doesn't matter how much money someone makes if they can’t pay their bills as they become due.

Bankruptcy is Relative

As an example, I once filed a bankruptcy for a physician[1] with a six figure income.  He made more on an annual basis than many of my clients make in five years.  The problem was that this physician followed the American Dream and tried to start his own practice.  He signed a lease for office space, financed the purchase of expensive equipment and sunk all of his hard earned saving into the new practice.  Now this man was a very good doctor.  He was good at diagnosing illnesses and kind to his patients.  He just wasn't a very good business man. Poor decisions were made and the practice eventually failed. After time, the doctor found work with another practice but by that point he had a million dollars plus in debt.  The companies that leased him office space and financed his equipment had filed lawsuits against him and there was simply no way that he could pay everyone. After much prayer and deliberation, he made the decision to seek bankruptcy relief.

Another Misconception: The Means Test

The next step was to determine whether the bankruptcy laws would allow him to file a chapter 7 straight bankruptcy or would he be required to choose one of the reorganization bankruptcies and repay some or all of his debt over time.  In 2005, significant changes were made to the bankruptcy code. Primary amongst the changes was the creation of a means test.  The means test is a long and convoluted test but generally provides for a presumption that a debtor who earns more than the median income for a household his size cannot file for chapter 7 bankruptcy protection.

The truth, however, is that this presumption can often be overcome.  Ironically, it is many times easier for a very high income debtor to overcome the means test than someone who is barely over median income.  For example, in performing the means test analysis, the debtor’s attorney can deduct most secured debt payments.  So if the debtor has a high car or house payment, these payments can be deducted in determining eligibility. An individual with a $5000 house payment will have a bigger deduction than someone with a $1000 mortgage payment.  Also, a debtor who can prove that a majority of his debt is business debt as opposed to general consumer debt can be completely exempt from the means test.  These examples may not seem fair but they are in line with the way that congress drafted the law.  Again, it is ironic that a law with the stated purpose of preventing wealthy people from filing for straight chapter 7 bankruptcy often leads to just the opposite.

Get The Proper Guidance

So the answer to the question is that you may not make too much money to file bankruptcy. You certainly should not assume this to be the case. Instead, you should seek the advice of an experienced consumer bankruptcy attorney.  Our conveniently located offices offer a free and confidential consultation with an experienced attorney.  Please contact us if you have questions concerning bankruptcy.  Please don’t make assumptions or follow the advice of someone who may not have your best interests in mind.

[1] Some of the specifics concerning this client have been modified to protect his identity.

 

Related Information

• Could You Owe Too Much to File Bankruptcy?
• How Bankruptcy Effects Your Bank Account
• Debt Settlement or Bankruptcy?