Can you qualify for bankruptcy when you earn a living wage?

On Behalf of | Sep 6, 2022 | Chapter 13 Bankruptcy |

Bankruptcy is a very powerful tool that discharges debts and puts an end to aggressive collection activity. Obviously, the potential is there for unscrupulous and unethical people to abuse bankruptcy protections by taking out excessive debt and then intentionally filing for bankruptcy to avoid paying it back.

Companies with an interest in securing full repayment from the people that borrow money from them have lobbied for restrictions on bankruptcy to minimize the possibility of such abuses. Income limits are one example of bankruptcy rules that help protect the businesses that lend money to others.

Will income limits prevent you from filing for bankruptcy if you earn a decent wage but have unsustainable levels of personal debt?

Chapter 7 bankruptcy may not be an option

Also known as liquidation bankruptcy, Chapter 7 bankruptcy is a relatively quick process, although the trustee overseeing your bankruptcy can demand that you sell or even refinance certain assets to repay what unsecured creditors you can.

To qualify for a Chapter 7 personal bankruptcy filing, you must pass a means test where you compare your adjusted income to the state median for your household size. If your income is higher than that limit, you won’t be able to file for Chapter 7 bankruptcy

However, Chapter 13 bankruptcy might still be an option.

Chapter 13 bankruptcy protects wage earners

Some people refer to Chapter 13 bankruptcy as a wage earner’s plan. You only receive the discharge of your remaining unsecured debts after making at least three years of structured payments through the courts.

You negotiate a repayment plan in a meeting with creditor representatives and a trustee who then oversees the distribution of your monthly payment to your various creditors. Individuals with competitive salaries can qualify for bankruptcy with a Chapter 13 filing.

Although they will have to budget carefully during the repayment plan, they can discharge the remaining balance on their unsecured debts at the end of that payment plan. They also won’t have to worry about selling off or liquidating their personal property the way that those filing Chapter 7 bankruptcy do.

Learning about Chapter 13 bankruptcy may help you feel confident about filing despite your competitive wages or significant personal property.