January 21, 2020

Chapter 7 and Middle Class Debtors

Over the past few weeks, I have received several emails from potential clients that begin with lines like “my salary is over $100,000 and I need to file Chapter 7 to protect myself against lawsuits from credit card companies” or “together, my wife and I earn well over $100,000 but we need to file Chapter 7 because….”

In each of these cases, I have had to respond to the prospective client with the bad news that about 99% of the time, Chapter 7 is not going to be available to an individual or couple whose household income exceeds $100,000.   Why?  Under the current bankruptcy law, something called a “presumption of abuse” arises is your gross household income exceeds the “median income” for a similarly sized family in the State where you live.

In Georgia, where I practice, the median income for a family of 4 is $66,711.  If there are more than 4 people in a household, you would add $6,900.  If you make $100,000, you would need a family of 9 to fit within the median.  Note that these figures will be adjusted upward as of January 1, 2008 but the general principle here still applies.

If you do not meet the median income test, you could still qualify for Chapter 7 under something called a “means test” which allows you to deduct certain permitted expenses from your median income figure.  Unfortunately the means test is derived from IRS calculations used when people negotiate installment payments on overdue tax debt.  In other words, you don’t get a lot of deductions.

As a practical matter, you might squeeze into a Chapter 7 if your income is just over the median, but if you are $20,000 or $30,000 over the median, you are facing a real uphill battle.

If you don’t fit into a Chapter 7, your only alternative is Chapter 13.   Here, too, the $100,000 income family is likely to feel a squeeze.  My experience with the means test suggests that families the $70,000 to $100,000 range won’t qualify for Chapter 7, and the means test will require a Chapter 13 payment that often is not affordable.

Over the next few weeks, I’ll be working on a video presentation that will demonstrate how the means test works.

About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.

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