We often hear in the news of wealthy people declaring bankruptcy. Can someone earn millions of dollars and still declare bankruptcy?
It all depends on the individual’s circumstances. One of the primary purposes of bankruptcy is to discharge or cancel certain debts to give an honest debtor a “fresh start.” In such cases, the debtor will have no more liability for debts that are discharged. A Chapter 7 bankruptcy case does not involve the filing of a repayment plan as in a Chapter 13 bankruptcy case. Instead, the Chapter 7 bankruptcy trustee gathers and sells the debtor’s non-exempt assets and uses the proceeds of the sale to pay creditors in accordance with the provisions of the Bankruptcy Code. Part of the debtor’s property may not be sold because it is subject to liens and mortgages that pledge the property to other creditors. In addition, the Bankruptcy Code will allow the debtor to keep certain “exempt” property.
But since Chapter 7 bankruptcy is really meant only for people who truly cannot pay their debts, the law now requires a Chapter 7 debtor to pass a “means test” to see if he qualifies. This test consists of two stages. In Stage 1, the Bankruptcy Code compares the debtor’s current monthly income to the state median (see table below for the Arkansas figures). If it is less than the state median, the debtor qualifies and can skip Stage 2. If the debtor’s current monthly income exceeds the state median, the Bankruptcy Code in Stage 2 looks at the income minus certain allowed expenses, over five years. If the debtor earns too much, his case gets converted to a Chapter 13 bankruptcy or is dismissed.
