Does High Income Prevent Chapter 7 To Discharge Income Taxes?

A prospective bankruptcy client contacted me about filing Chapter 7 to eliminate substantial income tax debtor for years 1995 through 2001. The debtor filed all his returns in a timely manner, and it appears he qualifies to discharge the income tax liability. He had relatively small amounts of unsecured credit card debt. The client said he had visited two other bankruptcy attorneys who had told him he could not file for Chapter 7 bankruptcy because he makes too much money, approximately $110,000 per year family income. The attorneys told the client his Chapter 7 would be rejected as substantial abuse. I disagreed, and think this person will qualify for Chapter 7 regardless of his income.

Most court opinions I’ve read have stated that the "means test" is the primary, if not exclusive, criteria of substantial abuse under the new bankruptcy law. If a prospective debtor does not fail the means test his Chapter 7 bankruptcy cannot be rejected because he makes too much money relative to his income. People whose debts are not primarily consumer debts are exempt from the means test under the new bankruptcy law. In most cases, "non-consumer" debts are debts incurred in failed business or an investment. Tax debts also fall into the category of non-consumer debts. Therefore, this prospective debtor is exempt from the means test because most of his debts are for income tax. I think he can file Chapter 7 bankruptcy even if his income is relatively high for bankruptcy debtors

posted by Jonathan Alper , bankruptcy and asset protection attorney, Orlando, Florida