What if you make too much money to file bankruptcy?

  • I would love to have this problem.

    Today I met with a couple who have four children and earn over $120,000 a year.  Their mortgage payment is only $1,200 a month, so the home is more than reasonable, but their credit card debt of over $83,000 is staggering.

    The husband is current being sued and has a garnishment pending for 25% of his wages.  (In case you’re wondering how to garnish someone, the Utah State Courts have a great “How To” website for garnishment at http://www.utcourts.gov/resources/forms/garnishment/ .

    He needs to stop the garnishment but was worried that their overall income was too high to file bankruptcy.  In a way it is.  They make too much to file a Chapter 7 (absent some amazing expenses like very high child support or alimony).  They make $120,000 and the median income for their family size is currently $82,790.  They make almost $40,000 above the median income.  So even if we filed a Chapter 7, the U.S. Trustee (DOJ) would step in and move to dismiss our case or convert it to a Chapter 13.

    This means that we have to file a Chapter 13.  Because the husband makes so much money, we have almost $2,000 a month in DMI (disposable monthly income).  This means that when we file the case, he will have to pay at least $2,000 a month for 60 months to his creditors, or pay them all off in full, whichever is smaller.

    With $83,000 of credit cards over a 60 month plan, the payments end up being around $1,500 a month (with a few extras thrown in).  This pays all of their creditors off in full, over a 5 year plan, at 2% interest.

    So yes, kind of, they make too much for a chapter 7, but they can still file bankruptcy.  It just has to be a chapter 13.

    This also means that his paychecks won’t be garnished.  25% of his $8,000 a month take-home would have been $2,000 a month one creditor, with the phone still ringing, legal fees building, and interest accruing.  Bankruptcy was a much better option.

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