Can You Make Too Much Money to File for Bankruptcy?

A common misconception is that high-income earners cannot seek protection under the bankruptcy code. In reality, your income doesn’t automatically disqualify you from bankruptcy relief. You may still be able to file for either Chapter 7 or Chapter 13 bankruptcy regardless of how much you earn. If you don’t qualify for these specific types, you may still be eligible to file for bankruptcy as an individual under Chapter 11, which is often reserved for individuals or businesses with complex financial situations.

When it comes to eligibility, disposable income plays a key role. Disposable income refers to the amount of money you have left after covering necessary living expenses such as rent, utilities, groceries, and transportation. The means test evaluates your current income over the six months prior to filing to determine eligibility for Chapter 7 or Chapter 13 bankruptcy.

For Chapter 7 bankruptcy, courts will often apply what is known as the “means test” to determine if your disposable income is low enough to qualify. Qualifying debt is determined by the means test and the types of debts you have, such as credit card debt, personal loans, and credit card balances. If your disposable income is too high, you may instead need to pursue Chapter 13 bankruptcy, which involves reorganizing your debts into a manageable repayment plan over three to five years.

Chapter 11 bankruptcy may also be an option if you have significant disposable income but require a tailored approach to restructuring your debts. Job loss or reduced income is a common reason people consider filing bankruptcy.

Ultimately, while your income level is a factor, it is your overall financial situation—including your disposable income—that determines which type of bankruptcy you may qualify for. Consulting with an experienced attorney is especially important, particularly for self employed individuals or those with complex finances, to help you better understand your options and choose the right path forward.

The Means Test for Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the most popular form of consumer bankruptcy. It is called a liquidation bankruptcy because the assets that are not exempt will be liquidated to repay a portion of your debts. Most people are able to keep nearly all of their assets because the exemptions are extensive. When you receive a discharge of your debts under Chapter 7, you no longer have to repay your debts. However, certain debts, such as some taxes, long-term obligations, or debts for misconduct, are not discharged in bankruptcy and remain your responsibility.

To qualify for Chapter 7 bankruptcy, your income must be the state median income or less. If it is higher, then you must qualify under the means test.

The means test examines whether you will have any discretionary income left after all of your bills are paid each month. The test involves deducting both actual and predetermined expenses, such as car payments and other allowable living expenses, from your gross income to determine your disposable income for Chapter 7 eligibility. In some cases, certain debts, such as some taxes or student loans, may be considered business debt for eligibility purposes.

If only one spouse is filing, the financial details of both spouses may still be considered to assess the household’s overall financial situation. If you do not have discretionary income after these deductions, you can still file Chapter 7 bankruptcy even if your income is very high.

High-income Chapter 7 bankruptcy filers have to prove that they are filing their petitions in good faith. This means that your expenses must be fair and reasonable. You will not be able to pay for luxury items while claiming that you cannot repay your creditors.

Can you make too much money to file for bankruptcy if you do not pass the means test? No, as you may still qualify to file for bankruptcy protection under Chapter 13.

Allowable Expenses in the Means Test

When high income earners consider filing for bankruptcy, understanding allowable expenses in the means test is crucial. The means test is designed to determine whether your current monthly income, after subtracting certain predetermined and actual expenses, leaves you with enough disposable income to repay your debts. This calculation is especially important for those with substantial incomes, as it directly impacts eligibility for Chapter 7 bankruptcy or the structure of a Chapter 13 repayment plan.

Allowable expenses are specific costs that bankruptcy law permits you to deduct from your monthly income when calculating disposable income. These expenses include essential living costs such as mortgage payments, car loans, and other secured debt payments.

Medical bills, tax debts, and domestic support obligations like child support and alimony are also considered allowable. For high income earners, it’s important to note that certain business debts may be deducted if they exceed consumer debts, and charitable contributions can also be included within reasonable limits.

The means test takes into account your entire household income, not just your own, which can affect your eligibility for different bankruptcy chapters. By accurately documenting allowable expenses, you can ensure that your disposable income is calculated correctly, which may help you qualify for Chapter 7 or determine the terms of a Chapter 13 bankruptcy repayment plan. This is particularly important for high earners who may have complex financial situations, including multiple sources of income or significant secured and unsecured debts.

Qualifying for Chapter 13 Bankruptcy

Chapter 13 bankruptcy is the other common type of consumer bankruptcy. Unlike Chapter 7 bankruptcy cases, people who file for Chapter 13 bankruptcy will enter into repayment plans, often referred to as a five year repayment plan, which can last up to five years.

People who are unable to pass the means test for Chapter 7 bankruptcy may instead file for protection under Chapter 13. However, this chapter also has eligibility guidelines for you to meet. Self employed individuals or those with unincorporated businesses can also qualify for Chapter 13 bankruptcy, as long as they meet the debt limits.

In addition to being current on your tax filings, you must also have a sufficient income to meet your obligations under the repayment plan. The plan can help you catch up on past due payments, including mortgage arrears and back taxes. Most taxes and certain priority debts must be paid in full through the plan. As a high-income earner, you likely will have enough income to qualify. Finally, your unsecured debts may not exceed $394,725, and your secured debts, including your mortgage, may not exceed $1,184,200 under 11 U.S.C. § 109(e).

Payments under the plan are distributed according to the priorities set by the bankruptcy court. Unsecured creditors receive payments according to the plan approved by the bankruptcy court. Filing a Chapter 13 bankruptcy case automatically stops most collection actions, including wage garnishments.

If you do not pass the means test under Chapter 7, and your debts exceed the limits for Chapter 13, you still have another option.

What Happens If You Don’t Qualify for Chapter 7 or Chapter 13 Bankruptcy?

Chapter 11 is a section of the bankruptcy code that is available to businesses and individuals.

Under Chapter 11, individual debtors are able to reorganize their debts to protect their assets and to restructure their finances. However, Chapter 11 bankruptcy cases are rarely filed by individuals because most people are able to qualify for either Chapter 7 or Chapter 13. When people file for Chapter 11, they generally do so because their unsecured debts exceed the limits established for Chapter 13 or they are reorganizing real estate investments. The bankruptcy court oversees the bankruptcy case, approves the repayment plan, and ensures compliance with bankruptcy law throughout the process.

A Chapter 11 bankruptcy petition may be filed if you owe too much unsecured debt and if you do not pass the means test for Chapter 7. Qualifying debt levels and the nature of your debts, such as personal loans, credit card balances, and considered business debt, affect your ability to file under Chapter 11. You will have to propose a repayment plan through which you will make monthly payments to the bankruptcy trustee.

The trustee will then distribute your payments to the creditors. Unsecured creditors are paid according to the plan approved by the bankruptcy court. If you successfully complete your repayment plan, the court will issue a discharge at the end of your repayment period that absolves you of having to make any further payments to the creditors of the discharged debt balances.

Contact an Experienced Bankruptcy Lawyer

Can you make too much money to file for bankruptcy? Generally speaking, no.

Bankruptcy law is designed to provide relief for individuals and businesses facing overwhelming debt, regardless of income levels. However, the type of bankruptcy you qualify for will depend on several factors, including your income, expenses, and the amount of debt you carry. While Chapter 11 bankruptcy is typically reserved for businesses or high-income individuals with complex financial situations, most individual debtors qualify for Chapter 7 or Chapter 13 bankruptcy.

Chapter 7, also known as liquidation bankruptcy, allows you to discharge most unsecured debts quickly, while Chapter 13 involves creating a repayment plan to manage your debts over a period of three to five years. Each chapter has its own qualifications and requirements, which is why having an experienced attorney with specific expertise in bankruptcy law is critical. An experienced attorney can help identify overlooked deductions and navigate complex legal requirements, increasing your chances of qualifying for bankruptcy protections.

At the Law Offices of Craig L. Cook, our skilled bankruptcy attorneys specialize in helping consumer debtors navigate the complexities of Chapters 7 and 13. We are committed to guiding you every step of the way, ensuring you make informed decisions for your financial future.

To learn more about the type of bankruptcy for which you qualify, how to file bankruptcy, and how it can provide you with a fresh financial start, contact us online to schedule a consultation. Bankruptcy can help you find relief from overwhelming debt and take the first step toward financial stability and peace of mind.