bigjohnstud4200

Chapter 7 with over 100k earning?

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Hello,

A close friend of mine is looking to file bankruptcy. He and his wife used to make just over 200k a year before he was laid off. He is now employed again after nearly a year and the combined income is now about 115k a year. The problem is that they acquired bills before he was laid off that are now too much to pay with their current income. He saw a BK attorney that told him that his income makes him ineligible to file Chapter 7 and that he must file 13. I am trying to help him figure out his disposable income, however, none of the calculators I have found include calculations for unsecured debt. I'm wondering if there is anyway that he can claim Ch. 7 even with their combined income?

This is for AZ.

Thanks, BJS

BTW: I did do a quick search but was unable to really get down into it. Please excuse me if this has been answered a trillion times.

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The reason the calculators don't recognize unsecured debt is, you can't claim a monthly expense on a debt that you will discharge in bk. The theory is, this is money that is now disposable income.

Keep in mind, the means test is only half the battle. The other half is if you have enough disposable income to fund a CHapter 13.

The only way to figure out disposable income is filling out forms I and J.

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The means test IS the test to see if you have disposable income to fund a 13.

The test IS NOT a test of how much income you have. It is a test to see if you have disposable income sufficient to fund a meaningful distribution to unsecured creditors. If you have sufficient disposable income (somewhere around $150/month leftover), then you're pushed into a 13 by failing section 707 due to a "presumption of abuse". You don't count credit cards or any debts not surviving bankruptcy. Typically, folks with six figure incomes usually have to have large secured debts such as mortgages and car payments to avoid means test failure.

I know a person who received a discharge two weeks ago with about 135k in combined income with wife w/ no kids. They have a sizable mortgage at 9%, two car loans ($1000/month total), and +$100k in student loans. All of this meant that by the time they ran through the means test, they had NO disposable income leftover. They passed the means test- thus he was able to discharge $50k in credit card debt. Let's not get into a debate about fairness or morality- just presenting facts.

There is a second hoop to jump through though. The means test is an objective part of 707. The second portion is a subjective test for the judge to make. You risk a "totality of the circumstances" dismissal by the judge if the facts are such that it appears you are abusing the system. Plenty of case law out there on this one. But overall, it has to be pretty egregious to have a judge dismiss your Chapter 7 if you pass the means test.

This also all hinges on assets with equity. High earners tend to have assets- and if they have equity above and beyond the relatively low exemption amounts, they'd lose those assets in the Chapter 7. That would be a good reason for someone to enter Chapter 13 voluntarily.

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