Are You Really A High-Income Debtor?

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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  2023 is as follows:

Individual Family of 2 Family of 3 Family of 4
$57,364 $70,490 $84,176 $101,907

*For each additional family member over four, add $9,900.

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.

WHAT NOW?

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.

WHAT IS THE BANKRUPTCY PROCESS?

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Filing bankruptcy is an important decision. Bankruptcy is designed to give you a fresh start by eliminating overwhelming, harmful debt so you can begin anew financially.

All in all, the process usually takes around three months from beginning to end. Your first step is to schedule a free consultation with one of our attorneys. If you can, bring along your financial information and bills for our attorney to review. Eventually, in order to file your case, we will need a complete list of your assets and debts.

During your consultation, your attorney will discuss exemptions that will allow you to keep equity in your home, cars, retirement accounts and other items.

Then, once we have all your documentation, your case is signed, and your costs and fees are paid, we file your case. A meeting with the United States Trustee is scheduled about 30 days after filing. These meetings are currently being held in our Eastgate office by telephone. You and your attorney will to meet together with the trustee.  The meeting typically takes 10 -15 minutes.

Although a good majority do, not every one qualifies for a Chapter 7. Whether you qualify is based on your income, family size, debts and other financial information. If you do not qualify for a Chapter 7 case you may file a Chapter 13 bankruptcy which is a repayment plan that protects wages and assets from attachment and interest from accruing while completing the plan. A Chapter 13 may be necessary to save a house or car from repossession.  A Chapter 13 case can be converted to a Chapter 7 in many circumstances. We are with you throughout the process to modify your case as necessary over the months or years as your circumstances change.

In a Chapter 13 case, clients pay a percentage of unsecured debts. Depending upon your situation,  the amount repaid can be as low as 1%. We will need your income for the last six months to formally evaluate whether you should do a Chapter 7 or Chapter 13 case.

Our office does not charge for the initial consultation. Your attorney will quote you a flat rate after evaluating your case. The more detailed income and debt information you provide at the initial consultation, the better we can properly advise you of your legal rights. Call 513-752-3900 to schedule an appointment at either our Eastgate or Middletown locations.

 

COVID 19 AND MY BANKRUPTCY

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The recent Covid pandemic has hit many families financially. As businesses adjust to the rise and fall of new cases of infection, there is still uncertainty. Federal and state governments have implemented measures to protect the health and financial lives of families and businesses have responded with varying options to delay the payment of mortgages, car loans and credit card payments.

Federally, the U.S. Congress has passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Among other relief, this act has deferred the payment of some government backed student loans, delayed the foreclosure of many government backed mortgages, provided added unemployment compensation, and expanded current bankruptcy relief.  Special temporary provisions have been made that allow forgiveness of taxes and or penalties on the liquidation of IRA, 401(k), and other retirement funds. CAUTION should be taken before cashing in your retirement plan, as other relief is available that allows you to eliminate debt, while preserving your nest-egg for your future. Do NOT liquidate a retirement plan without first speaking with us first!

Many have benefited from mortgage and auto loan forbearances or deferrals. These forbearance programs contain different requirements when no longer in forbearance. Our office has experience addressing these issues in bankruptcy, is familiar with the lenders, the U.S. Bankruptcy Court, and  U.S. Trustee as it relates to forbearance loan repayment.

We understand the concerns of individuals and families facing struggles caused directly or indirectly by Covid-19. The most common questions we receive revolve around the ability to keep a home, keep or buy a car, keep or lose tax refunds and bonuses, and continue to save for retirement. Each situation is unique. No two cases are the same. Often, bankruptcy is not necessary, or is better held off until circumstances have changed. From the CARES Act, to the HAVEN Act, to state law changes and uncertain upcoming Acts, it is good to consult with a firm that is focused on debt relief law. At Keegan and Co., Attorneys, we understand recognizing and responding to constant change is the key to crafting an individualized approach to debt relief.