Many people assume that if their income is relatively high, they cannot file for Chapter 7 bankruptcy. Usually this assumption is incorrect. It is not unusual for a high-income debtor to file Chapter 7. In reality, high-income Chapter 7 bankruptcies are filed everyday.
What constitutes as high income is a matter of perspective and depends on many factors, such as where you live, your living expenses, the size of your family, etc. For example: a salary of $80,000.00 for a family in rural Ohio goes a lot further than the same earnings in the city center of Columbus or Cincinnati. With that being said, a “high-income debtor” is a debtor with earnings above the state median income for the debtor’s family size.
The Ohio state median income per family size (determined by census figures) as of 2022 is as follows:
|Individual||Family of 2||Family of 3||Family of 4|
*For each additional family member over four, add $9,000.
WHY IS THE STATE MEDIAN IMPORTANT?
Whether your income is above or below the Ohio state median income determines if you will be able to discharge all or most of your debts in Chapter 7, or be required to pay back at least a portion of your debt under Chapter 13. If your average gross earning for the six months before filing for bankruptcy is at or below the state median for your family size, you may file under Chapter 7 (assuming that you meet other requirements).
On the other hand, if your average gross earnings for the six months before filing is over the median, you will have to take a “means test” to determine if you qualify for Chapter 7. This means test considers your income minus certain allowable expenses. Frequently, the results allow a debtor with substantial earnings but high expenses to file Chapter 7.
ARE YOU REALLY A HIGH-INCOME DEBTOR?
Before jumping to meet the means test, debtors need to determine if they are actually high-income debtors for the purposes of the test. We often have clients with seemingly high earnings who are surprised that they fall below the state median. Many of these clients have not considered the size of their families. One of the most important factors in determining whether or not you are a high-income debtor is family size.
Even if the debtor is above the state median, it is often by much less than the debtor presumed. The closer your overall earnings are to the state median, the easier it is to pass the means test.
WHAT TYPE OF INCOME?
If you appear to be over the median, you may still be able to avoid the means test, depending on what type of earnings you have. Not all sources of money count as income for calculating gross earnings. For example, under the Bankruptcy Code certain income, primarily social security, is excluded from your gross income for the purposes of the means test. This exclusion will often bring a debtor’s gross earnings below the state median, thus avoiding the means test. In addition, because the bankruptcy code focuses on “regular income”, some irregular earnings may not count as “gross income”.
CAN I PASS THE TEST?
Finally, even if you must take the means test, it is still quite possible that you will qualify for Chapter 7. Very often, high-income debtors have high allowable expenses, including mortgage payments, vehicle payments, etc., that will offset their earnings. Although the means test is complex and must be handled carefully, it is not at all unusual for high-income debtors to pass the test. However, failing to list income of any kind can lead to unpleasant consequences. Attention to detail is the name of the game.
We have spent most of this blog discussing the initial qualification for Chapter 7. However, it is important to note that even if you pass or avoid the means test, you do not automatically get to file Chapter 7. You must meet all other requirements, including a showing that after expenses, you have no significant disposable income to pay your creditors. In addition, there may be a reason for choosing Chapter 13, such as saving a house from foreclosure or a car from repossession. In some cases, a non-bankruptcy solution such as debt negotiation may be available.