- - http://longislandbankruptcyblog.com -

Counseling High-Income Consumer Bankruptcy Debtors

16954274 [1]Written by Craig D. Robins, Esq.
 
Many High-income Debtors with Significant Income Can File Chapter 7 Bankruptcy and Still Pass the Means Test
 
During the past few years I’ve noticed a fascinating trend: I’m counseling more and more bankruptcy clients with high income and high debt. 
 
Representing such debtors requires addressing certain special issues which I will focus on in this article which was originally published in the June 2010 Issue of the Suffolk Lawyer, a Bar Association periodical.
 
Blame the Recession 
 
Perhaps the current drawn-out recession is affecting an increasing number of consumers beyond the low and middle-class – long the bastion of typical bankruptcy filers.
 
In addition, falling real estate values have wiped out the equity in many people’s  homes.  Many middle and upper-class Americans have thus lost their ultimate source of long-term savings.
 
Chapter 7 Bankruptcy Is Usually the Consumer’s Best Choice 
 
Assuming that there’s no need to consider Chapter 13 to stop foreclosure, I always strive to file Chapter 7 bankruptcy petitions for all my clients – but doing so requires that they qualify under the means test.  After all, if a Chapter 7 case goes smoothly, the debtor will discharge most or all debts and ideally keep all assets.
 
For high-income debtors, Chapter 7 eligibility has become rather challenging considering that under the 2005 Bankruptcy Amendment Act (BAPCPA), a consumer debtor will almost certainly face opposition to getting a discharge if he or she does not pass the means test.   There is no salary cap for filing Chapter 7 Bankruptcy [2].
 
The U.S. Trustee is especially vigilant in reviewing any case that is deemed abusive, or that may even be close to being abusive.
 
Accordingly, analyzing the facts of a high-income debtor becomes critical and properly preparing the means test and other bankruptcy schedules becomes crucial.
 
How Much Income Is “High-income”? 
 
Lately I’ve been regularly filing Chapter 7 bankruptcy petitions for families with incomes well over $100,000.  I recently filed two Chapter 7 cases where the family income was over $200,000.  I actually wrote a blog post a year ago entitled:  Can You File Chapter 7 Bankruptcy on Long Island With a Family Income of $200,000 a Year?  [3] 
 
Considering the perceived income limitations for seeking Chapter 7 relief under the new bankruptcy laws, such high-income filings seem difficult or impossible; yet in practice, they are not.
 
Generally, a high-income debtor is one who has income over $100,000 per year or $10,000 per month.  In my bankruptcy practice, high-income debtors are often executives, doctors, assorted professionals, and families of double-income spouses.
 
General Principle for Filing High-income Cases 
 
A high-income debtor can file for Chapter 7 relief if the debtor a) passes the means test or conversely does not need to qualify for the means test; and b) passes a totality of circumstances test for filing in good faith – often meaning that all of their expenses are reasonable and necessary.  See:  If I Make Over $100,000 a Year, Can I Eliminate Credit Cards Debts in Bankruptcy? [4]
 
Many high-income debtors also have relatively high levels of debt.  A former executive previously earning several hundred thousand dollars per year can easily have as much credit card debt. 
 
In such cases, the debt must have been incurred in good faith and must not be unreasonably high in relation to the debtor’s income at the time the debt was incurred.  Counsel should devote extra time to reviewing the various debts in such cases.
 
The Business Debt Exception to the Means Test 
 
Many high-income debtors have very substantial debt obligations from failed business ventures, often due to having signed a personal guarantee.  A debtor is excused from preparing the means test if the debtor’s debts are not primarily “consumer debts”, and there is a box on the means test for this exclusion.
 
A “consumer debt” is defined as a debt incurred by an individual primarily for a personal, family or household purpose.  On the other hand, some courts have defined “business debt” as debt that is incurred with a “profit motive.”  I hope to devote a future column to a more involved discussion about how courts have defined debt as either business debt or consumer debt.
 
To see a more thorough discussion of this, please see my post:  This Debtor Didn’t Have to Do the Bankruptcy Means Test [5].
 
Variables Making High-income Debtors More Eligible for Filing 
 
Certain individuals are able to pass the means test much more easily than others.  Those that have large families with multiple dependants, large mortgages, two car loans or leases, mortgage arrears and tax arrears are more likely to qualify under the means test because these items can all be used as means test deductions. 
 
Since individuals with large famlies can benefit from increased means test deductions, consider issues in Determining Household Size for the Means Test [6].
 
Frequently, individuals with high income receive year-end bonuses.  By timing the filing of the petition, the impact of year-end bonuses on the means test can be minimized or even reduced.  See my prior post:  Advance Planning: File Bankruptcy Before You Get a Year-End Bonus [7].
 
The Budget Must Be Reasonable 
 
Even if the debtor passes the means test, that alone is not enough to demonstrate that the case is not abusive, and that it is filed in good faith.  All budget items must be reasonable and necessary, based on the debtor’s actual income going forward.  This requires a more subjective and equitable assessment of the debtor’s circumstances.
 
For example, the U.S. Trustee is likely to object to an expense of $2,000 per month for food for a family of four, but will not have any problem with an expense of $1,200, even though that is on the high side.
 
Some expenses will not pass muster.  The U.S. Trustee will likely argue that an expensive summer camp is unreasonable, as sending the kids there is being done at the expense of the creditors.
 
Issues with Keeping Rental Property
 
High-income debtors are much more likely to have investment real estate in addition to their homes.  In such cases, there is an issue as to whether keeping the rental property is reasonable.  If the expenses of retaining the property exceed the amount of rental income, then keeping the property will result in a reduced amount of disposable income.
 
In such a case, the U.S. Trustee will argue that the debtor will have additional income each month to make payments to creditors if the investment property is abandoned.
 
Maintaining a Luxury Residence 
 
A high-income debtor is much more likely to have an expensive home.  However, there are some cases across the country in which the U.S. Trustee argued that it is unreasonable for a debtor to keep a luxury home with a very high monthly mortgage at the expense of the creditors.  This issue has not been addressed in our Circuit.
 
Alternatives If Debtor Isn’t Eligible for Chapter 7 Relief 
 
If the debtor fails the means test or simply has too much disposable income, then there are still a number of options available.  The debtor can file for Chapter 13 relief if his or her secured debts are less than $1,081,400 and unsecured debts are less than $360,475. 
 
If the debt levels exceed these amounts, they can file for Chapter 11 relief.  Debt Negotiation is also an option in which the attorney can negotiate settlements with the creditors.  See my blog post:  Options If You Fail the Bankruptcy Means Test [8].
 
————
 
About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., [9]is a regular columnist for the Suffolk Lawyer [10], the official publication of the Suffolk County Bar Association [11]in New York. This article appeared in the JUNE 2010 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island [12], please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com [12]
 
 
Be Sociable, Share!
  • [13]
  • [14]
  • [15]
  • [16]
  • [17]