In 2005 the bankruptcy code was changed to make it difficult for above median income earners to file Chapter 7 bankruptcy and discharge their debts. In Texas, the median income for a 2 person family is $30,502. If a debtor with a 2 person family earns more than $30,502 they may be forced to file Chapter 13 bankruptcy, although there are exceptions. The change was made to the bankruptcy code because it was presumed that above median income debtors who file Chapter 7 bankruptcy were abusing the bankruptcy system. To prevent this "abuse" the legislators changed the bankruptcy code to force most of the above median income debtors to pay all or part of their debts over a period of 3 to 5 years in Chapter 13 bankruptcy. But is it really abuse if a debtor earning a high income files Chapter 7 bankruptcy? Not necessarily. While of course there are always those debtors who will attempt to abuse the bankruptcy system, the majority of the debtors who file bankruptcy do so in good faith. And even high income debtors may have valid reasons for filing Chapter 7 bankruptcy.
- Drastic changes in their circumstances. Just like lower income debtors, high income debtors may lose jobs or businesses which drastically change their financial circumstances. While this change may not reflect immediately on their balance sheets it can have longer term effects.
- Medical emergency. Medical debt alone can wipe out the savings and disposable income of even high income debtors. Attempting to repay medical debt in Chapter 13 bankruptcy may not be feasible for the high income debtor, especially if they are unable to work.
- Divorce. Divorce can have huge financial consequences which impact a debtor's financial situation. Someone who was once high income may lose significant income after a divorce, making it necessary to seek Chapter 7 bankruptcy protection.
If you are a high income debtor who needs to file a Chapter 7 bankruptcy, please speak with a bankruptcy attorney to find out if your case can overcome the presumption of abuse.