What Constitutes A High Income And What Factors Could Impact This As It Relates To Being Able To File A Chapter 7 Or A 13 In New Jersey?
Under the Bankruptcy Code, individuals in each state must comply with the means test, which calculates a family median income every six months based upon family size and the state’s median income based upon the number of earners in the house. In New Jersey, after May 15, 2021, for the next six months, a single-earner household median income is $71,941, a two-earner household is $88,511, a family size of three a $112,416, and the family size of four is $134,345. For each individual in the home who is a dependent for each family member, $9,000 is added above the 4 person household median income of $134,345 to increase the median income. The basis for concluding an individual as high income would be the means test numbers. Still, the factors relative to determining whether an individual could file a Chapter 7 or 13 case are also subject to an standard guidelines for of state and local expenses under IRS standards. Those are also state and county standards for costs such as food, clothing, and secured debt payments for housing and other essential items.
Do Most People Assume That If Their Income Is Relatively High, They Can’t File A Bankruptcy?
Many people assume that if their income exceeds the state median income, they may not file for a chapter 7 case and would likely be forced to file chapter 13 bankruptcy. There is not absolute answer to the amount of income that can be earned for an individual who seeks chapter 13 or 7 relief. Still, an individual above the median income would fail the means test unless they were able to show that they had primarily non-consumer debts. Non-consumer debts must consist of more than 50% of the total scheduled debt, and that debt was not incurred for personal, family, or household purposes. The purpose of non-consumer debt would be evaluated when the debt was incurred. Home mortgages, which are typically the most significant debt of generally are consumer debt. Most tax debts are not consumer debt, but student loan debt can be considered business debt depending upon the state and interpretation of the case law defining a business debt.
The primary consideration is if the individual signed significant personal guarantees of business debt or guaranteed a commercial lease for their business. Those claims would be business debts, and an individual could have exceedingly high earnings. Yet, under the business debt exception, because the debt is not primarily consumer debt, an individual can still qualify for chapter 7.
Is The State Median Important In These Cases?
The state median income is the starting point to determine whether individuals will file a chapter 7 or a chapter 13. Individuals who are over the state median income and with allowable deductions applied other aspects of the means test for expenses may still qualify to file Chapter 7 even if they earn in excess of the state median income. In chapter 13, under median Debtors could elect to file a three-year plan. Still, if individuals are over the state median income and applying the other aspects of the means test and the expense adjustments, they may be required to do a five-year Chapter 13 plan based on the fact that they are presumptively over the state median income.
If Someone Appears To Be Over The Median, Could They Still Avoid The Means Test Depending On What Type Of Earnings They Have?
All individuals must have the means test applied to their case. It isn’t necessarily an avoidance but an application of the test. Again, the business debt exception is 50% or more debt primarily for business purposes and not for personal, family, or household purposes. However, there are other examples of individuals who would not have to be over the median income but still qualify for chapter 7, which are rare. I’ve never had a case involving them. Still, it could be a disabled veteran with a 30% disability from service or due to disability, and the debt primarily incurred during active duty or homeland defense. They need to have both a 30% disability and debts incurred during active duty or homeland defense and must meet both conditions to be exempt from the remainder of the means test.
The other would be National Guard exclusions, in which case there are a few conditions. You must be a member of a reserve component or National Guard unit and you must be on active duty or performing homeland defense activity for at least 90 days. After the 90 days of service and for an additional 545 days after the service ends, the exclusion from the means test applies. These are rare circumstances, but still, the ability for people to be over the median income and still qualify for chapter 7 is feasible.
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