One of the biggest urban legends in bankruptcy is that if you make more than the median family income for your state, you can’t file for bankruptcy.
This is absolutely wrong.
I have filed Chapter 7 bankruptcy cases for people who make over $350,000 a year. Every week I file for people who make over $100,000 a year. All of them qualify easily under the means test even though they make more than the median family income.
How did this urban legend get started? As Paul Harvey would say, “That’s the REST of the story.”
The Bankruptcy Code requires you to determine your annual household income using a formula that pretty much averages your income over the last six months. You then compare your *household* income with the median *family* income for a comparably sized family in your state. Here in Maryland, the figures are:
Family Size Median Income
1 $51,141
2 $66,190
3 $78,119
4 $94,017
and so on.
If your household income is less than the comparably-sized family income, you’re eligible for Chapter 7 and stop filling out the form. So you might then say that if you’re over this limit, you’d be ineligible. Not so.
The reason is that if your household income is over the median income, you are allowed to deduct certain expenses from your income. Housing, food, transportation, taxes, insurance…a host of things. For the vast majority of people, even if your income is above median, these deductions bring it under, and make you eligible.
But even if they don’t, the analysis still isn’t over.
You can argue “special circumstances.” For example, the average income over the past six months includes income from a job you no longer have. Or a one-time bonus payment. Or something else that makes the Current Monthly Income inaccurate given your current situation.
Only if you’re over the median income, the deductions don’t reduce your income enough, and you have no special circumstances would you be forced out of a Chapter 7. But Chapter 13 or Chapter 11 is still available.
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