Is there a maximum income limit for filing bankruptcy?

Income limits for Chapter 7 Bankruptcy

Bankruptcy laws instituted in 2005 established income limits for Chapter 7 Bankruptcy. Now, it is much more difficult for higher income filers to have their unsecured debts immediately discharged through Chapter 7. Instead, higher income debtors are forced to file Chapter 13 bankruptcy and restructure and repay their debts under a Chapter 13 debt repayment plan.

How do you know if your income is too high to file Chapter 7 bankruptcy? The first step is to determine if your income is above the state's median income. For instance, in the state of Texas, to qualify for Chapter 7 bankruptcy as a single-earner your income must be equal or less than $41,354, in a two person household it must be equal or less than $56,296 and in a three person household it must be equal or less than $59,567. Consider, however, the median income for each state varies. To find out if you qualify for Chapter 7 bankruptcy in your state, you need to review your state's median income.

So what happens if your income is above the median income for your state? Does this mean you must file Chapter 13 bankruptcy? No, if you fail the income test for Chapter 7 bankruptcy there is an additional means test you must pass to file Chapter 7 bankruptcy.

Means testing and Chapter 7 bankruptcy

The means test is used to determine if a debtor has enough disposable income to file Chapter 13 bankruptcy and repay a portion of their debts. The calculation is a bit complicated. To make the calculation you can use an online means test calculator or talk to a lawyer.

Passing the means test

First, you must calculate your current monthly income, which is the average income received for the 6 months prior to filing for personal bankruptcy. There are also certain deductions and presumed expenses which can be subtracted to lower your average monthly income.

To pass the means test you must have "at least $182.50 in current monthly income after the deductions listed in 11 U.S.C. § 707(b)(2)(A), (ii)-(iv) are deducted and this is equal to $10,950 over the next five years (regardless of the amount of debt) or you have $109.59 in income (which is $6,575 over the next five years) and are able to pay your unsecured creditors more than 25% of the debt you owe them (over the next 5 years)."

Filing Chapter 13 bankruptcy

As mentioned above, if your income is too high or you do not pass the means test you will be required to file Chapter 13 bankruptcy. Chapter 13 will not discharge your debts immediately but will instead require you to make monthly payments over a three to five year period, according to a strict budget monitored by the court.

Chapter 13 also has some income requirements. For instance, you will have to prove to the court that you have sufficient income to make payments, not only your secured debt obligations, but also for your debt repayment plan.

There are also debt limitations. For instance, secured debts cannot exceed $1,149,525 (this amount is periodically adjusted for inflation), and your unsecured debts cannot exceed $383,175 (this amount is also periodically adjusted for inflation).