Person Earning $25,000 Per Month Wants To File Chapter 7 Bankruptcy

Most people would agree that a person who makes $25,000 per month should not be able to discharge his unsecured debts in a Chapter 7 bankruptcy. One such high-earning individual came to my office to discharge over $1million of unsecured debts. The unsecured debts were mostly business lines of credit used to finance his wholly owned real estate corporation. Because of the real estate crash, his business was insolvent. This person also owed substantial back taxes and gambling debts. He had little or no non-exempt assets. The "means test" enacted in the 2005 bankruptcy law was supposed to prevent Chapter 7 bankruptcy by people who could afford to pay a significant portion of their debts. This client can afford to pay his monthly debt service. Can a person earning $300,000 per year wipe out his debt obligations?

In this case, I think the client may qualify for Chapter 7 bankruptcy. The means test does not apply to all debtors. The means test applies only to those debtors whose debts are "primarily" consumer debts. Consumer debts include credit cards for personal use, home mortgages, and car loans. For this individual, I think that gambling debt, although dischargeable in bankruptcy, is also a consumer debt. However, business lines of credit, taxes, and credit card debt incurred by a business but guaranteed by the individual are usually not consumer debts. When I added up this debtor’s obligations I found that most of his debt was not consumer debt. His bankruptcy is not subject to means testing.

The debtor is not "home free." Many U.S. Trustees would challenge this bankruptcy as abusive because the debtor has substantial net income each month available to pay his debts. Others have argued that the means test is the exclusive measure of financially abusive Chapter 7 filings and that people who are exempt from the means test can file Chapter 7 bankruptcy regardless of income. I don’t believe this issue is decided definitively by bankruptcy courts. My experience is that high-income Chapter 7 debtors exempt from means testing draw extensive scrutiny from bankruptcy trustees. The trustee tends to examine all aspects of these Chapter 7 cases much more closely and requires extensive substantiating documents. People who make a lot of money tend to have a lot of assets; high-income Chapter 7 debtors exempt from means testing should be very careful to report all income and all assets.

Bankruptcy court is not a friendly environment for wealthy people. I usually advise clients with large amounts of assets (even exempt assets) or large amounts of income to avoid bankruptcy if at all possible.

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