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“My friend told me that I make too much money to file for bankruptcy.”

Just to put an end to all the speculation out there about this question, let me eliminate the suspense up front: there are no requirements that you make a certain amount before you qualify for bankruptcy. Now that I’ve ended the suspense, let me delve a little further.

I think what most people have heard is that if you earn over a certain dollar amount, then you cannot qualify for a Chapter 7. And generally speaking, this is true. BUT, there are a great number of factors that go into determining whether or not you actually do earn above that certain dollar amount.

I know that last sentence sounds a bit silly. When someone asks you how much you make, you tell them whatever it is that you earn per year. Sounds pretty straightforward, right? So why are there ‘factors’ that go into whether or not you actually make this amount or not?

Let me give you an example:

Say you make $60,000.00 per year. Your debts are out of control, and the credit card companies are hounding you for payments. You’ve even received a court summons in the mail for a breach of contract action. Now you start to look into filing for bankruptcy. But your friend says, ‘You make way too much to qualify for bankruptcy. You’re out of luck!’ My guess is that your friend doesn’t know too much about the laws of bankruptcy.

To begin with, the court looks primarily at what your household size is. They do this because they have come up with average incomes for different sized households. So let’s say that your household size is four (you, your spouse, and your two children). Your spouse is unemployed and your children are below the age of eighteen. Well, according to the government, the average (or median) income for a household of four is $68,705 (as of 1-25-11). So in this scenario, you are below the median income, and you would generally qualify for a Chapter 7 (yes, I said ‘generally.’ Don’t you hate it when an attorney says that?! But there are of course always exceptions, which I wll get to in later posts).

Now let’s change the facts around a little bit: Let’s say you are a household of two (yourself and your spouse). Your spouse is disabled and earning social security payments as a result. You still make $60,000.00 per year. According to the government, the median income for a household of two is $50,295.00 (as of 1-25-11). Now you are clearly above the median income level. Does this mean that you do not qualify for a Chapter 7? Not necessarily. There are lots of deductions and exemptions that the government allows (like a mortgage payment, car payment, taxes from paycheck, what you donate to charitable organizations, how much you spend in medical cost, etc.) that can be used to get you below the median income level.

Again, let’s change the facts a bit more: Let’s say you are a household of three (yourself and your two children). Now you own your own business, and you grossed well over $175,000.00 last year. The median income for a household of three is $57,664.00 (as of 1-25-11). So now you are almost $125,000.00 above median income. That’s a no-brainer, right? There’s no way you could qualify for a Chapter 7!! Not so fast. The government determines whether you are above or below the median income by looking at what you made in the six months prior to filing for bankruptcy (regardless of whether it’s a Chapter 7 or Chapter 13). This six month period is called the CMI period (or Current Monthly Income). For many small business owners who are looking into filing for bankruptcy, the last six months has not been all that great. Sure, they made a bunch of money last year, but this year? And specifically the last six months?! Not a whole lot. So it may very well be that in the last six months your business has grossed only $70,000.00. ‘But wait,’ you say. ‘Even if my business has only grossed $70,000 in the last six months, that is still clearly above the median income for a household of three!!’ Yes, you are correct. But the government allows for one more step to be taken. If your income is business-related, then you wouldn’t look at the gross earnings. Rather, you would look at the net earnings (or how much you actually take home after business expenses are taken out). So if your business has grossed $70,000 in the last six months, and the expenses to operate your business come to $30,000, then the net earnings are actually $40,000. In this scenario, you are in fact below median income for a household of three, and qualify for a Chapter 7.

Listen, there is an endless number of situations and specific sets of circumstances. I’ve only given a couple of examples here to illustrate. But the point I’m trying to make is this: just because someone told you that you don’t qualify for bankruptcy doesn’t necessarily make it so. Your friend may be the greatest person in the world and loyal until the end of time, but that doesn’t mean he/she knows the ins and outs of the Federal Bankruptcy Code.

Fortunately, finding out what your options may be is actually pretty easy. To speak with an experienced St. Louis bankruptcy attorney today, all you need to do is call. All phone and office consultations are free of charge.