Does a regular paycheck disqualify a consumer from filing for chapter 7 bankruptcy?
If you’ve been researching your bankruptcy options, you’ve likely heard of the means test.
Indeed, much has been written about the means test, the vaunted gatekeeper to chapter 7 bankruptcy protection implemented by Congress as part of BAPCPA in 2005.
Under that law, families that earn above the median income in their state must pass the means test in order to qualify for chapter 7 bankruptcy.
Does this mean you can’t file for bankruptcy if you have a job?
No, it does not.
See also: Can I Be Fired For Filing Bankruptcy?
It is possible to file for chapter 7 protection while earning a salary
Will a new job give you a failing grade on the means test and prevent you from filing chapter 7 bankruptcy?
First of all earning a salary doesn’t automatically preclude anyone from qualifying for chapter 7. Only individuals and families that earn more than the average in their states must pass the means test in order to qualify and often do. A job at a professional services firm, Like J.P. Morgan, that pays a higher salary, will make the path to bankruptcy harder than a job at Walmart that doesn’t pay as much. However, keep in mind that the income guidelines for chapter 7 look backwards.
Qualifying for chapter 7 looks at past earnings
In addition, if you’ve had a prolonged period of unemployment even a new job with a high salary shouldn’t pose a means test problem. This is because the means test deducts allowed expenses from your current monthly income (average income over the last six months).
So, the means test looks backward. This means the brand new job you just landed won’t factor in just yet.
If after expenses you have very little “disposable income” you will qualify for chapter 7.
The six month look back period allows your period of unemployment to be averaged in with your new salary in calculating your current monthly income. For example, if you have recently landed a job that pays $100,000 annually but have only been working for 2 months, you will likely still qualify to file for chapter 7 bankruptcy because your average income over the last six months (which will include four months of no salary) will put you below your state’s average income. The means test can be complicated, if you have questions, it is wise to consult an attorney. If your attorney advises you that your income is too high for chapter 7, chapter 13 bankruptcy may be a good option.
Walter Metzen is a Board Certified Specialist in Consumer Bankruptcy with over 28 years of experience. He’s represented more than 20,000 bankruptcy clients in and around Detroit where his firm is located. View his profile here.