What if my income makes me ineligible for bankruptcy?

Bankruptcy is a very complex piece of legislation made more complex by the fact that some states have enacted their own versions of what is, essentially, a federal act. Despite having state bankruptcy laws in place, bankruptcy is still petitioned through the Federal Bankruptcy Court system. While it is fairly rare, it is technically possible to be ineligible for bankruptcy because of your income. As I stated, it is rare, however, the legal system is starting to see more people fitting this criteria every week.

So why would income make you ineligible for bankruptcy? To qualify for a Chapter 7 petition for bankruptcy, your income needs to be below the state median. The term ‘income’ in this situation is actually a figure that is determined by averaging your actual before tax income over the proceeding six months. If you had a high income job, and then found yourself out of work, that high income job may push you over the state median – this means your ineligible for a Chapter 7.

The bad news is that on November 1 2011, the median income in all states dropped. For one person households, the drop is only a few hundred dollars per year, but for a four person household, the drop could be as high as $4000 depending on the state you live in. Every state’s median income is derived from data collected by the Census Bureau and with unemployment high it was only natural that median income levels were going to drop. This means that more people are now ineligible to file a Chapter 7 petition than before.

On the other hand, if you are trying to file a Chapter 13 petition for bankruptcy, you may be ineligible due to too little income. In a Chapter 13 petition, you need submit a payment plan that will cover your secured and priority debts as a minimum. If you are not working or you have a very small income, you may not be in a position to submit a plan that adequately covers those debts. The trustee may then refuse to accept your payment plan. As you can see, there is the possibility for a catch 22 situation, technically ineligible for either forms of bankruptcy.

There are options available that an experienced bankruptcy attorney can consider. While you may not qualify for a Chapter 7 petition based on income, but if you are only slightly above median, there is an alternate route whereby your attorney can work through every expense. This route looks at allowable expenses such as car costs, rent, education and medical expenses, which may well modify your income enough to bring you below the state’s median. . You may also qualify for special circumstances, or totality of circumstances – the latter will look at your lost employment to determine if this is going to be a long term situation. After all, if you don’t qualify today, you may well in two or three months when your past employment has a reduced effect on your average income.

There’s a saying we hear a lot in law – “what a difference a day makes.” In law, this is very true. If you file for bankruptcy on a Thursday, you may be ineligible for a Chapter 7 – submit that same petition on the Friday, and you could be eligible. It all comes to the average of your income over the past six months. By waiting one day, you could move from one pay period to another, with the second being unemployment, and that can significantly drop your average income to below the state’s median.

That indeed may well become your final option – waiting. Of course, that is only an option if you have that time up your sleeve. This well depends on your circumstances and the amount of pressure coming from creditors. What is important to note is that bankruptcy law is always in flux. What is true today may not be true tomorrow, especially when judges enter new interpretations of the law. The smartest move anyone can make when considering bankruptcy is to engage the services of an experienced bankruptcy attorney. It is their job to keep up to date with all the latest changes in bankruptcy.

Many experts believe that we may be headed for another recession. Don’t enter a second recession with piles of debts. I can counsel you on your debts. I am sure that I can be of assistance to you, a family member or a friend as we all know someone experiencing trouble these days even if we are not experiencing our own financial troubles. Please do not hesitate to make contact with me. I emphasize courteous and discrete consultations packed with plenty of information. The life impact of meeting with me in person will be unforgettable. You will enjoy a new peace of mind and a fresh hope for the future with a new roadmap for financial success that we develop together. You can email my scheduler through our website for your free 30 minute consultation at www.washingtonbankruptcy.com or e-mail directly [email protected] To schedule immediately, we can be reached at 253-383-1001 M-Th 9am-5:45pm and Friday 9am – 12pm.

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