Over the past few days, I have received several calls and emails from potential clients who comprise a very different profile from my traditional client base. These folks are solidly middle class to upper middle class families, often earning $100,000+ and living in $400,000 houses. Here is an example of the type of correspondence I have been getting and my response thereto:
Jonathan: I desperately need your advice. I work in sales at XYZ company and last year I earned more than $200,000. I am married with 2 kids. This year I’m on track to earn about $120,000. My house is worth $425,000, but the first and second mortgage combined equal to about $435,000. I am also financing a Mercedes – the monthly payment is $725 per month and the payoff is $37,500. I also have $35,000 in credit card debt. I am not behind on anything and I have borrowed twice against my 401(k) to keep afloat. My wife and I have made the decision that we are prepared to give up the house and the car and move into an apartment. I would like to file Chapter 7 and walk away from everything – when can I schedule an appointment? –Fred
Here is my response: Dear Fred – unfortunately I don’t think you can file a Chapter 7. Under the bankruptcy law, you cannot qualify to file a Chapter 7 unless your income falls below a certain threshold called the “median income.” As part of my analysis, I will compare your household income with the median household income for a family of 4 in Georgia ). As your household income exceeds the median by over $50,000, a median income evaluation in your case would create something called a “presumption of abuse.” This presumption is rebuttable in theory, but as a practical matter, I think is unlikely that you would be able to squeeze into a Chapter 7.
Instead, the “means test” of personal bankruptcy would dictate that you would have to file a Chapter 13 repayment plan. Assuming that you did give up your house and your expensive vehicle, the bankruptcy trustee would expect you to downsize your lifestyle substantially in a Chapter 13 – at least to the point where you would have sufficient disposable income to pay back all of your creditors in full in a Chapter 13 case that will last 3 to 5 years.
Given that you are in sales, you also run the risk of committing to a Chapter 13 that provides for a payment based on current income. Chapter 13 is not a flexible vehicle so you should not go into a Chapter 13 expecting that your plan payment would change if your commission income goes down.
So, for folks like Fred, the alternatives are – maintain your lifestyle and struggle to keep your head above water until you find a way to earn more money, or walk away from the expensive big ticket items, reduce your lifestyle, and commit every penny of disposable income to a 3 to 5 year payment plan.