Can You Make Too Much Money to File for Bankruptcy?

When people think about bankruptcy, they often envision individuals who are completely destitute and unable to meet basic financial obligations. However, the reality is that bankruptcy can be a viable option for people across a wide range of income levels, including those who appear to have substantial earnings.

Can you make too much money to file for bankruptcy? The answer is nuanced, and even high-income earners might find themselves in situations where bankruptcy is necessary.

Understanding Bankruptcy Eligibility

Bankruptcy laws are designed to provide relief to those who are overwhelmed by debt, but they also include provisions to ensure that the process is not abused. Here’s a breakdown of how income affects eligibility for the two main types of personal bankruptcy:

• Chapter 7 Bankruptcy: Often referred to as liquidation bankruptcy, Chapter 7 is intended for individuals who cannot repay their debts. To qualify, you must pass the means test, which compares your income to the median income in your state. If your income is above the median, you might still qualify based on allowable expenses and debts, but the test can be stringent.
• Chapter 13 Bankruptcy: This type of bankruptcy is a reorganization plan where you repay some or all of your debts over three to five years. There is no strict income limit for Chapter 13, but your disposable income will determine the repayment plan’s feasibility. High earners might be required to repay a significant portion of their debts, but they can still benefit from the structured repayment plan and the protection from creditors.

Why High-Income Earners Might Need Bankruptcy

Even individuals with substantial incomes can find themselves in financial distress. Here are several reasons why high-income earners might still need bankruptcy protection:

• High Levels of Debt: Earning a lot of money does not necessarily mean you are free from debt. Many high-income earners carry significant mortgage debt, car loans, credit card debt, and other financial obligations. When these debts become unmanageable, bankruptcy can provide a solution.
• Unexpected Financial Hardships: Life is unpredictable, and high earners are not immune to unexpected events such as medical emergencies, job loss, divorce, or business failures. These situations can lead to sudden financial strain that even a high income cannot mitigate.
• Business Debts: Entrepreneurs and business owners often have personal liability for their business debts. If the business struggles or fails, they might find themselves unable to meet both personal and business financial obligations.
• Legal Judgments: High-income individuals can face substantial financial liabilities from lawsuits. Legal judgments can result in significant debt, leading to a need for bankruptcy protection.
• Asset Protection: Bankruptcy can help protect certain assets from creditors. High earners may choose to file for bankruptcy to safeguard their property and investments from seizure.

How Bankruptcy Helps

Bankruptcy offers several benefits, even to those who appear financially stable:

• Debt Discharge: Bankruptcy can eliminate or reduce debt, providing a fresh start and relief from unmanageable financial burdens.
• Structured Repayment Plans: Chapter 13 bankruptcy offers a structured repayment plan that can help individuals manage their debts in an organized manner, often resulting in more favorable terms than individual negotiations with creditors.
• Automatic Stay: Filing for bankruptcy triggers an automatic stay, which halts most collection activities, including lawsuits, wage garnishments, and harassment from creditors.
• Financial Rehabilitation: Bankruptcy can serve as a tool for financial rehabilitation, allowing individuals to reorganize their finances, regain control, and work towards long-term financial stability.

While it might seem counterintuitive, even high-income earners can benefit from bankruptcy protection. The means test for Chapter 7 and the structured repayment plan of Chapter 13 ensure that individuals, regardless of income level, can find relief from overwhelming debt.

If you’d like to learn more about qualifying for bankruptcy, contact the Law Offices of Robert M. Geller at (813) 254-5696 to schedule a free consultation with an experienced attorney.