INCOMES, DEBTS AND BANKRUPTCY

Sometimes I will get a phone call asking how much debt someone must have in order to file a bankruptcy.  Another question that comes up is regarding income levels, as in ‘can I file if I have too much or too little income?’

First, income levels as well as debt levels do not determine whether you can file, but will determine which type of bankruptcy you can file.  Yes, it is possible that you may earn too much income to file a Chapter 7 bankruptcy, but a Chapter 13 can be filed for those wage earners having higher incomes.  Regarding income levels, simply because one has a six figure income will not necessarily prevent him or her from filing a Chapter 7 case.  In order to determine that, more investigation is needed regarding household size and expenses associated with the family.  Granted, a single unmarried individual having a six figure income will most likely prevent the filing of a Chapter 7.  In reality, this type of individual probably does not want a bankruptcy on his credit record anyway.  However, if the household consists of husband, wife, three maybe four children and a mother or mother-in-law – that six figure income is used up pretty fast.  Of course, determining whether the husband, wife or both have the ability to file a Chapter 7 is determined by applying the Means Test calculation to their situation.  Obviously, if an individual or a larger household has no or very little income, the filing of a Chapter 7 is most likely possible.  Again, the Means Test calculation must be completed to be sure.

If it is determined that the six figure income household cannot utilize Chapter 7 of the Bankruptcy Code then they can always turn to a Chapter 13 wherein their debts can be paid over the course of 36 to 60 months.  The amount of the household’s discretionary income will determine how much the unsecured creditors of that household will be paid.   As we all know, secured creditors are generally paid before unsecured creditors.  And sometimes debtors will want to file a Chapter 13 case because they have fallen behind on some of their payments such as cars or homes.  The Chapter 13 case will allow these types of debtors to get back on track by placing arrearages into a Chapter 13 Plan to payout over that 36 to 60 month period of time.  Also included in that Plan is a way to payoff unsecured debt such as credit cards, medical bills or any other type of unsecured debt – sometimes at pennies on the dollar.

For those asking about debt levels, the amount of debt does not determine whether you can file, rather the question is should I file.  If the level of debt is low, i.e. $5,000 or less, then it may make more sense to try to find some other way to take care of that debt.  A bankruptcy does have a negative affect on a debtor’s credit history.  If bankruptcy can be avoided, it should.  On the other hand, if your debt is more than $5,000 then bankruptcy may be a way to address the problem.  Again, a thorough analysis is needed to determine whether bankruptcy is right for you.

Therefore, when considering bankruptcy, don’t dismiss the possibility because you think you may make too much money or have too much or little debt.  There may be a way to handle your debt problems in a reasonable and affordable way.  Bankruptcy is not a total cure-all for debt problems, but it is a useful tool when used effectively.  If you happen to be one of those people I have mentioned above, don’t despair that nothing can be done, you won’t know until you check it out.

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