Do you have to do a Chapter 13 bankruptcy if you make too much money?

Posted by Wesley Scott on June 18, 2020 at 1:50 PM
Wesley Scott

money_management_tipsWhile the clear majority of bankruptcy cases filed in Minnesota are Chapter 7 (liquidation) bankruptcies. You would be surprised how often people making $50K, $80K, $100K, or even $200K+ need to file for bankruptcy relief. While it is easy to say, “if I made that much money, I could definitely afford my bills and live a normal life.” The problem is, that unexpected events occur (which should now be more obvious than ever), which can cause people earning a high income to no longer afford their bills.

If you are earning more than the median income for your family size, then a Chapter 13 restructuring of your debts is the most common method of bankruptcy relief. The basic principle of a Chapter 13, is that you pay what you can afford to pay, for up to five years, and then any bills which are not paid off get discharged, so that you will be debt free at the end of the payment plan. This is a HUGE advantage over trying to solve debt issues through consolidation; because outside of bankruptcy, the payments you must make on your debt, are always based on how much you owe, and not necessarily what you can afford. Only some debts for child/spousal support, student loans, fines, and some secured debts will survive after a Chapter 13 bankruptcy.

Many people are allured to the quick relief of a Chapter 7 bankruptcy filing, but there can be tremendous benefits and savings had through a Chapter 13 payment plan. The law basically says that if you can afford a Chapter 13 payment plan, you should do one, but if any life-changing events occur during your Chapter 13 payment plan, you can later convert your case to a Chapter 7.

There are exceptions where Chapter 7 relief is necessary, even if you are making a lot money. One common occurrence, is when a small business fails. If you have primarily business debts you can file for Chapter 7 regardless of your income. One of the main purposes of the bankruptcy code, is to encourage entrepreneurship, so that a bad business decision does not have to burden you for the rest of your life.

When your debts are personal, and you are making good money, you may still file for Chapter 7 relief, but this requires overcoming a presumption with the court that you should file for Chapter 13 payment plan. This can be a rigorous standard to meet, so you should NEVER attempt to overcome this presumption without an experienced bankruptcy lawyer. However, there are certainly plenty of circumstances, such as lay-offs, ongoing medical issues, or other causes which can make filing a Chapter 7 the best option, even if you are earning higher income.

When ready to find out more, reach out to Kain & Scott at www.kainscott.com.

A word from MN Bankruptcy Lawyer, Wesley Scott