Chapter 13 Bankruptcy More Difficult for High Income Debtors

I have found that bankruptcy cases are more difficult for my clients with high income for two reasons. First, they are used to living a certain way, and sometimes feel entitled to their lifestyle and insulted that I would suggest they slim down their budget. Success in Chapter 13 bankruptcy requires self-discipline and a willingness to change past spending habits. When you are in a Chapter 13 bankruptcy case you are not allowed to incur new debt without the court’s permission. This includes using credit cards. For a person who has $50,000 in credit cards debt, making the transition to life without credit cards can be difficult. They must learn to budget, to save, and to only spend what they earn.

Second, the math used in calculating payments for high income debtors is not in their favor. Chapter 13 bankruptcy uses a calculation called a means test to determine a debtor’s ability to repay unsecured creditors. This form uses the debtor’s average income for the last six months to calculate their current monthly income. Then the form calculates their deductions using the standard IRS deductions for the region in which they live and their household size. The total of the deductions is subtracted from the current monthly income and the remaining amount is the debtor’s monthly disposable income. If the disposable income is a positive number, then this is the amount available to be paid to unsecured creditors each month in the Chapter 13 plan.

What creates difficulties for high income debtors is that many deductions on the means test are not based upon the debtor’s actual expenses but rather they are based on the average expense for their household size in the area they live. So the means test might say that the debtor gets a $200 deduction for electricity but their actual expense each month is $400. The debtor’s actual income and budget as shown in the schedules may show that they cannot afford the plan payment required by the means test. Debtors in this situation must reduce their budget in order to make the Chapter 13 case work.