Filing for bankruptcy is a significant decision that many individuals facing financial difficulties consider. In New Jersey, like in other states, the type of bankruptcy one can file depends on several factors, including income level. If you are a consumer with a gross income above the median income for your state and household size, you might be ineligible to file for Chapter 7 bankruptcy. Instead, Chapter 13 bankruptcy could be a more suitable option. This post will explore why higher-income earners might not qualify for Chapter 7 and how Chapter 13 serves as an alternative.

Understanding Chapter 7 Bankruptcy

Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” allows individuals to discharge most of their unsecured debts. This means debts like credit card balances, medical bills, and personal loans can be wiped out. However, to qualify for Chapter 7, you must pass the “means test,” which evaluates your income, expenses, and overall financial situation.

The Means Test: A Gatekeeper for Chapter 7 Eligibility

The means test is designed to limit the availability of Chapter 7 bankruptcy to those who genuinely cannot repay their debts. Here’s how it works:

1. Median Income Comparison: First, your gross income is compared to the median income for your state and household size. If your gross income exceeds this median, you move to the next step of the means test.
2. Disposable Income Calculation: The next step involves calculating your disposable income by subtracting allowable living expenses and secured debt payments from your gross income. If your disposable income is above a certain threshold, you fail the means test and cannot file for Chapter 7 bankruptcy.

Why High-Income Earners Might Fail the Means Test

If your gross income is higher than the median income in New Jersey for your household size, it’s likely that you will not qualify for Chapter 7 bankruptcy. This is because the means test assumes that individuals with higher incomes have the financial capacity to repay at least a portion of their debts. Therefore, high-income earners are often steered towards Chapter 13 bankruptcy instead.

Chapter 13 Bankruptcy: A Structured Repayment Plan

For those who cannot qualify for Chapter 7, Chapter 13 bankruptcy offers a structured way to manage and repay debts. Here’s how Chapter 13 differs and why it might be a better option:

1. Repayment Plan: Unlike Chapter 7, Chapter 13 does not discharge all debts immediately. Instead, it involves creating a repayment plan that spans three to five years (5 years if your income is over median), allowing you to pay off your debts over time based on your disposable income.
2. Protection of Assets: Chapter 13 allows you to keep your property, as long as you adhere to the repayment plan. This can be particularly beneficial if you have significant assets or secured debts, such as a home mortgage or car loan, that you wish to retain.
3. Debt Consolidation: Under Chapter 13, your debts are consolidated into one monthly payment made to a bankruptcy trustee, who then distributes the funds to your creditors. This can simplify the repayment process and make it easier to manage your finances.

Advantages of Chapter 13 for High-Income Earners

For individuals with incomes above the state median, Chapter 13 offers several advantages:

• Debt Management: Chapter 13 provides a manageable way to pay off debts without the pressure of immediate liquidation; it can protect you from the lawsuits of your creditors, unlike debt settlement.
• Credit Impact: While bankruptcy will impact your credit, Chapter 13 may be seen as less severe than Chapter 7 since it involves repaying your creditors over time.
• Legal Protection: Filing for Chapter 13 triggers an automatic stay, which halts all collection actions, including foreclosure, repossession, and wage garnishment, giving you time to reorganize your finances.

Conclusion

If you are a higher-income earner in New Jersey struggling with debt, understanding your bankruptcy options is crucial. While Chapter 7 might seem appealing due to its debt discharge feature, failing the means test because your income is above the median could disqualify you. However, Chapter 13 bankruptcy offers a viable alternative, providing a structured repayment plan that allows you to manage your debts effectively while protecting your assets. Consulting with a bankruptcy attorney can help you navigate the complexities of the bankruptcy process and choose the best option for your financial situation.

By exploring Chapter 13 as an alternative to Chapter 7, high-income earners can find relief from debt while maintaining a path toward financial stability. Schedule a free bankruptcy consultation with Jennifer Weil, a New Jersey bankruptcy attorney, to discuss your options.