Does My Income Matter When I File for Bankruptcy?

by Luke Homen

Your income is a significant factor in personal bankruptcy cases. If it’s too high, you won’t be able to use Chapter 7 (liquidation) to discharge your debts and obligations unless your living expenses are high too. The concepts are simple, but how this may work for you may not be.

There is no “one size fits all” bankruptcy. Choosing the right one based on your income, goals, and needs will give you the best results. The Convenient Bankruptcy team can help you explore your options. Call us at 405-296-0069 or fill out our online contact form, and our bankruptcy attorneys will contact you.

What is Bankruptcy?

Thanks to federal laws, bankruptcy allows you to declare that you can’t pay your obligations. Through a complex process, your debts may be discharged, so you need not pay them, but some debts, like child support, will remain. Your assets may be sold to pay your debts (Chapter 7), or you may need to pay them over time (Chapter 13) to keep at least some of your assets. Our bankruptcy lawyers in Oklahoma can guide you through this process to ensure you make the best decisions for your financial future.

What are the Options for Personal Bankruptcies?

The two primary choices for personal bankruptcy are:

• Chapter 7: Your eligible unsecured debts are “discharged” (so you need not pay them), preventing your creditors from ever collecting them after assets are sold to pay them. To qualify, you can’t be a high-earning individual. 
• Chapter 13: Your debts are reorganized, and you pay your obligations (or a portion of them, depending on your circumstances) over three to five years. You may be able to keep property that would be sold in a Chapter 7 case. Chapter 13 is commonly used by those with higher incomes and people who want to try to stop their home from being foreclosed upon.
  

If you can’t keep up with the Chapter 13 payment plan, your case will convert to Chapter 7.

How Does Income Play a Role in Bankruptcy Filing?

There’s a “means test” for Chapter 7. Congress enacted it to close what they saw as a way for high-income debtors to lose what might be limited assets and pay what could be substantial debts. 

A formula places these types of debtors in Chapter 13, where they’d be required to pay debts over time. Chapter 13 payment schedules can be very strict, as well. So, only those with disposable incomes would be able to make these payments and pay their living expenses.

The means test determines your disposable income by taking into account your:

• Income
• Expenses
• Family size
• Debts
• Special circumstances
  

Most of those seeking Chapter 7 protection pass the means test. It allows those with consumer debts (like credit cards and medical bills) to use Chapter 7, while debtors whose obligations are related to a business they own are directed to Chapter 13. The test has two parts:

• Is your income less than your state’s average median income? This is based on what you earned in the last six months, which is doubled, to develop a figure for a year’s time. The first part of the means test checks whether your household income is below Oklahoma’s median income. There can be adjustments for recently lost or gained jobs. If your income is less than the median, you pass the test.
• If it’s more, the next step is documenting and calculating your “allowable expenses,” which cover living expenses like groceries, clothing, car payments, rent, and medical costs from the past six months. This is deducted from your household income to determine your disposable income. If it’s low enough, you can use Chapter 7.
  

The test has some flexibility, so even if you think your income is too high, if your expenses are also substantial, you may still be able to seek Chapter 7 protection.

Have Questions or Concerns About Bankruptcy? We’re Here to Help

If you or your business have financial difficulty and think bankruptcy might be an option, set up a free, confidential consultation with a Convenient Bankruptcy attorney. We can discuss your situation, income, priorities, and best options for reaching your goals.

This is an area of the law where doing it yourself can cause severe financial losses. There is much at stake in bankruptcy, so it’s worth consulting with a Tulsa bankruptcy lawyer. Schedule a consultation with the Convenient Bankruptcy team by calling us at 405-296-0069 or contact us online to set up a time to talk. You’ll be glad you did.