Living paycheck-to-paycheck can feel like walking on a tightrope, with just one stumble or unexpected emergency having the potential for a dangerous crash. That is an unfortunate reality for approximately 7 in 10 American households. Most people would associate this type of financial situation with income in the low-to-middle range. But a new survey revealed that high-income families are feeling the strain as well, with 36% of those earning over $300,000 per year reporting living paycheck-to-paycheck. This is actually higher than the 23% of those earning $100,000 to $300,000 yearly who live paycheck-to-paycheck. Possible explanations include larger fixed expenses, like housing in high-cost cities, and lifestyle creep, or spending more as income rises. Still, higher earners who live paycheck-to-paycheck often have more options for resolving their financial issues than those who earn less than $100,000 per year. If you earn a good living but can't seem to shake your debts, chapter 13 bankruptcy could pave the way to a future without debt. Schedule your free phone consultation with Phoenix Bankruptcy Lawyers today by calling 602-509-0955.

The Median Income Comparison Test

The Median Income Comparison Test comes into play in both chapters of consumer bankruptcy. Chapter 7 debtors can use it to show income eligibility so they don't ever have to conduct the means test. In chapter 13 bankruptcy, it is used to determine whether the debtor's payment plan lasts 3 or 5 years. The test is fairly straightforward: take the debtor's average income from the past 6 months and compare it to the median income for a household the same size as theirs in their state. Arizona's median income levels for bankruptcy are updated periodically, and even for a household of four, they fall far below $300,000 per year. Each additional household member beyond four only raises the limit by a modest amount.

That means that someone earning $300K+ per year would theoretically need well over a dozen children to pass the median income comparison test. So someone earning $300K+ might qualify for chapter 7 bankruptcy through the means test, and can pretty much expect their chapter 13 bankruptcy case to last 5 years as opposed to 3 years.

The Means Test

The Means Test is the alternative method of income qualification for chapter 7 bankruptcy, and determines how much a debtor pays each month in chapter 13 bankruptcy. It is conducted by finding the average monthly income and subtracting mandatory monthly expenses like rent or mortgage, monthly insurance payments, child support, utilities, and more. If the figure calculated is negative or too small to realistically pay off debts, that person is considered eligible for chapter 7 bankruptcy. However, the trustee will follow certain guidelines when reviewing means test calculations to make sure that all of the debtor's lifestyle choices are reasonable. Arizona's local standards for housing and utilities are quite low. The allowance for a one-person household in Maricopa County is less than the average rent for a one-bedroom apartment in Maricopa County, meaning the debtor would need a lower-end apartment, a studio, or roommates to meet this local standard. Even for a household of five, the allowance only rises modestly. So if a high mortgage payment is the reason someone making $300K+ is living paycheck-to-paycheck, they may still struggle to pass the means test and qualify for chapter 7 bankruptcy.

Chapter 13 Bankruptcy for High-Income Households

As shown above, it's highly difficult for a debtor to qualify for chapter 7 bankruptcy if their income exceeds $300,000 per year. But having a high income actually makes it easier to qualify for chapter 13 bankruptcy. This is because chapter 13 bankruptcy requires that the debtor be able to pay off bankruptcy costs, secured debts, and priority debts within the lifespan of their payment plan, here likely 5 years. But there are significant benefits to choosing chapter 13 bankruptcy over chapter 7 bankruptcy.

Chapter 7 bankruptcy only clears unsecured debts. This can be beneficial if the debtor only has debts like medical bills and unpaid credit cards. But if the debtor is facing repossession of a secured asset, like a home foreclosure, they will only have the three to six months that a chapter 7 case lasts to resolve those arrearages outside of bankruptcy, or the creditor can proceed with collection after the case has been discharged. Additionally, the debtor could have priority debts, and the wage garnishments stemming from some of those won't be stopped by a chapter 7 filing. Unsecured debts, or those that can be cleared in chapter 7 bankruptcy, are only repaid to the extent that the debtor can afford to in chapter 13 bankruptcy. If a chapter 13 debtor's case works out just perfectly, they may receive a discharge without paying back a single cent towards unsecured debts.

Lien Stripping in Chapter 13 Bankruptcy

Another benefit unique to chapter 13 bankruptcy is the possibility of lien stripping. This option is only available if the debtor owns a home with more than one mortgage, and the balance on the first mortgage is more than the home's market value. When these conditions are met, it can be a highly advantageous factor leading a debtor to choose chapter 13 bankruptcy for debt relief.

Surrendering Assets in Bankruptcy

One reason a person earning more than $300,000 per year can barely keep up with their bills is because they have secured loans on assets they can no longer afford. High-value assets cost more to insure, maintain, and replace, and those costs can add up quickly. Under these circumstances, paying off a secured asset may feel more like throwing money into a pit, especially if the asset has been damaged, leading to a decrease in value. The good news is that bankruptcy debtors can surrender secured assets without the typical associated financial penalties, even if they otherwise would be allowed to keep that asset in bankruptcy. So if a debtor wants to switch out a sports car or luxury vehicle for something more practical, or get out of an expensive lease, this would typically cost thousands of dollars. But a debtor can simply surrender an asset or cancel an executory contract under the protection of bankruptcy while their case is still active. This can help them create a healthier budget for life after bankruptcy discharge.

Have a High Income but Still Can't Get Out from Under Debt? Learn More About Your Debt Relief Options Today

In this day and age, earning a respectable salary is no guarantee that a household will be immune to financial troubles. And those with high income despite debt issues may struggle to show their income eligibility for bankruptcy. While it's possible for someone earning $300K or more to qualify for chapter 7, the odds are much higher that they will instead be eligible for chapter 13 bankruptcy. Chapter 13 is a lengthy and high-commitment endeavor, most likely lasting 5 years for households earning $300,000 or more. A bankruptcy attorney can help you estimate what your payments would be and determine if bankruptcy will interrupt any of your upcoming life plans. Schedule your free phone consultation with Phoenix Bankruptcy Lawyers today by calling 602-509-0955.