Sunday, July 6, 2014

Can the Rich File Chapter 7 Bankruptcy?

Bankruptcy is a good option for many rich people with debt problems. The best way to file is under Chapter 7 of the Bankruptcy Code. Chapter 7 bankruptcies normally last about 3 months (if you have a good attorney and no major complications) and the debtor gets a relatively easy discharge for most debt. They are relatively painless for the debtor. The vast majority of the work is done before the bankruptcy petition is filed with the Court. This is a powerful tool but is limited to those to qualify--although, there is an exception as noted below.

To qualify, the debtor has to show that his/her income over the last 6 calendar months is less than a certain amount. Those amounts change over time and are supposed to be a "median income" for people in your area. This is guess-work by the government, but Congress wanted it this way to reduce Chapter 7 filings. The government's theory is that, if you are high income, you should be in a Chapter 13 or 11. There are some cases where those chapters are preferable, but generally, most people would greatly prefer a Chapter 7 because it is so much easier.

If you are slightly over that income qualification amount, there is a formula that may bring your effective income down below the mark. Basically, we see if you qualify, and if you are close, we apply the formula to see if we can get below the mark. Some of the big factors that we look for to bring down your income is whether you: 1) are financing or leasing a vehicle, 2) have child-care expenses, 3) have health-care expenses, 4) provide expenses for others to the extent that they may be financially dependent on you--especially children or elderly people, 5) have extraordinary expenses associated with your employment, 6) have extraordinary involuntary deductions from your paycheck such as union dues or retirements plans, 7) have extraordinary energy costs associated with your home, and 8) are a veteran.

If you are well above the income level and we cannot find anything in the formula to bring your income low enough, then we will look at your debt closely to determine if we can file you as a non-consumer debtor. If over 50% of your debt is non-consumer, then the income test discussed above does not apply at all. In fact, we'll actually give the form to the Court blank when we file.

The definition of non-consumer debt is quite broad. This is where you need a skilled bankruptcy attorney. If you determine that Chapter 7 is right for you, then you obviously want the debt to be defined in the way that favors a Chapter 7. Non-consumer debt includes student loan debt, taxes, and any debt acquired for a business purpose. A business purpose would include anything that you used for seeking a profit.

Many wealthy people accumulate a ton of debt by engaging in failed business enterprises. For thousands of years, governments have determined that they would rather see you put that debt behind you and move on to another enterprise. We don't want you losing the incentive to work because of excessive debt. I have served clients who could not move forward in their lives because of business debt they accumulated by being part of a failed business or even victimized by a scandalous business. I can tell you that they are not proud to file, but they were faced with a situation where they had no incentive to work anymore.

Luckily, the system is designed to get them back to productive work again. At some point, when your debt is so high, there is no reason to work at all anymore, because all your money is going to debt service. In many cases, excessive debt may create a situation where you might as well stop working, reducing your past income till you qualify for Chapter 7. The non-consumer Chapter 7 provides and way to stay on the job while you go through the process.

These people often think they cannot qualify for a Chapter 7. We would be glad to sit down with you and review your debt, to make that determination.

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