Bankruptcy Not Just For The Low Income Folks

10 Nov Bankruptcy Not Just For The Low Income Folks

The lawyer’s website described Chapter 7 as the choice for families with low income.


The site recounted how “bankruptcy reform” tried to exclude higher income folks from Chapter 7.

That may have been the intent of the 2005 Congress but that isn’t the way the law they wrote works.

Means test in operation

Bankruptcy’s means test allows people with high incomes who have certain kinds of expenses to file Chapter 7.

The perverse truth is that payments on secured debt are deductible from income. Big mortgage payments, past due property taxes, car loans, all count as reductions in income for means test purposes.

Recent unpaid taxes are deductible on the means test. Delinquent child or spousal support is deductible.

It often seems to me that the people caught by the means test are middle class people who rent, drive paid for cars, pay their taxes, and don’t have lots of toys bought on time. Financial moderation merits no reward on the means test.

Just because you are over the median income for families of your size in your state does not mean you can’t file Chapter 7.

In fact, over the past three years in my bankruptcy practice, the average annual income of my clients has gone up at least $50K each year. Yet these clients are able to file Chapter 7 because of the composition of their debts.

Bankruptcy “reform” did not confine Chapter 7 to those making little money.

Means test escape hatch

Even stranger, people whose debts are not primarily consumer debts don’t even have to take the means test. Regardless of their income and regardless of their on going expenses.

So an individual who has hundreds of thousands in unpaid taxes of any age, or business debts, or even large tort liabilities may avoid jumping through the means test hoop. Those debts are not classified as consumer debts.

Congress certainly mucked up their device to sort out the people who need bankruptcy relief from those who don’t. In my experience, exceedingly few consider bankruptcy who don’t need it.

Lawyers should do better

Lawyers who practice in this area need to be more precise in explaining the law. The consuming public assumes that what lawyers write and publish is gospel.

Simple statements are punchy and appealing, but seldom accurate.

And the entire bankruptcy system makes no provision for the need of almost everyone to be saving more for retirement. That’s the abuse that bothers me.

Image courtesy of holeymoon.



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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.
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