Trouble for high income earners who need to file bankruptcy.
High income earners and bankruptcy makes for a tricky combination. In my experience, most high income earners can file bankruptcy if they need to. Having above-average income does not per se knock you out of filing bankruptcy.
Unfortunately, many high income earners receive bad advice. You may be told you can’t file, when in fact you really can if you go to one of the top bankruptcy lawyers.
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Bankruptcy for high income earners is a paradox. You have a great income. But you have also have tons of debt. You wish you could file Chapter 7 bankruptcy. But you have spoken to some bankruptcy lawyers who said you can’t file. You’ve been told you make too much money to file Chapter 7. In your case, that kind of advice may be completely wrong. Wrong advice often comes from novice lawyers who only dabble in bankruptcy law. But they have never really taken the time to master the subject.
Understanding how “non consumer debts” plays into the bankruptcy law is often the key to finding a way for high income earners and bankruptcy to coexist.
Bankruptcy Code Section 707 causes the law to divide all individual bankruptcy filers into two different categories. They are persons with “primarily consumer debts.” And, persons with “primarily non consumer debts”. Consumer debts are debts incurred for “consumption.” The Bankruptcy Code defines a consumer debt as an obligation incurred primarily for “personal, household or family use.”
People who have “primarily consumer debts” are subject to this other thing called the “bankruptcy means test.” But persons with primarily non consumer debts are not subject to the means test. (Remember this for later.) The means test is a bankruptcy court roadblock. It is designed to force high income earners to pay some or all of their debts.
The bankruptcy means test and the high income earner.
The bankruptcy means test artificially determines how much debt a high income earner must repay. It does that in two steps. First, average monthly income is calculated based on the amount of income you have received during the preceding six calendar months. (Generally, all income counts, except Social Security benefits.) Next, the individual is allowed to subtract various living expenses from monthly income.
But here’s the rub in calculating your means test. The expenses you are allowed to deduct are not always going to be the full amount of your real expenses. The deductions could add up to much less than your real expenses. Here’s why that is. The means test requires that expenses like food, utilities, and transportation are based on national statistics. They are not based on what you really spend. However, other expenses are based on what you spend, such as mortgage, and income taxes. If you don’t own a home, your rent deduction flips back to using a standard deduction, and once again, may be less than what you really do spend.
High income earners often hit a brick wall when it comes to passing the bankruptcy means test. That’s because your entire income is exposed to the means test calculation. Yet, less than all of your real living expense may be used as a deduction. The difference between the two is your “disposable income” which the law says you must use to pay your debts. All too often your disposable income is “left over money” you never really had. Without the advice of a bankruptcy specialist, you are likely to get caught in the bankruptcy means test trap.
A bankruptcy case example of non consumer debts.
Briefly, I want to give you an example of just one way we may get around the bankruptcy means test. The best way around it is to establish that your debts are primarily “non consumer debts.” Then you don’t even have to take the bankruptcy means test. For example, tax debts are considered to be “non consumer debts” because an income tax debt is not incurred to pay for something you bought. Thus, suppose your total debts are $100,000 in credit cards, and $110,000 in back taxes. In this example, your debts are “primarily non consumer.” Assuming your credit card debts are consumer debts, your debts are primarily non consumer debts because the amount you owe on taxes exceeds everything else. Hence, no means test required here. Even if your annual income is hundreds of thousands of dollars.
Everyone’s case is different. Often a high income earner can qualify for Chapter 7 bankruptcy, even when they have been told they can’t. In addition to the above example involving tax debt debts, there are many other scenarios that can play out to allow you to have a Chapter 7 bankruptcy discharge. A bankruptcy law specialist should know where the holes are in the means test. A specialist should know how to ask you the right questions to find a path to get you through the legal maze. Novice lawyers don’t always know what to ask you. And of course, you don’t always know what you should tell the lawyer. If the lawyer has not been properly trained, the lawyer may lack the experience and analytical skills to bring you safely through the means test maze.
Excerpt: Bankruptcy relief for high income earners is often possible. A Los Angeles Bankruptcy law specialist shares his advice and tips for high income earners who need Chapter 7 relief. High income earners and bankruptcy relief is often possible.
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