Earn Too Much for Chapter 7? How Chapter 13 Works Instead

You did the math, or a calculator did it for you, and the answer was that you earn too much for Chapter 7. The credit card balances are the same as they were before you checked.

Earning too much for Chapter 7 does not mean you earn too much for bankruptcy. For most people over the line, the answer is Chapter 13, and a Chapter 13 plan often looks better than people expect once the real numbers are in.

What does it mean to earn too much for Chapter 7?

It means you did not pass the means test, the income screen for Chapter 7. I explain the whole test in what is the bankruptcy means test, so here is only the short version.

Step one is the median income test. Your average gross income over the six full calendar months before you file is compared with the median family income for your state and household size. If you are at or below the median, you pass.

Step two is the full means test. If you are above the median, you subtract allowed expenses to see what you could pay unsecured creditors, such as credit cards and medical bills, over five years. Being above the median is not the same as failing, and plenty of people above the median still pass step two.

The median figures are updated periodically by the U.S. Trustee Program, and the figures that apply are the ones in effect on the day you file. That is why I check the current table before every filing instead of relying on a number someone read online.

What happens if I fail the means test?

If you file Chapter 7 and fail, the law presumes your case is an abuse of Chapter 7. The court can dismiss the case or, with your consent, convert it to Chapter 13.

You can try to rebut the presumption by showing special circumstances, such as a serious medical condition or a call to active military duty, that justify extra expenses or lower income. You have to document them and swear to them, and there has to be no reasonable alternative.

In practice, if I can see before filing that you will fail, the better move is to file Chapter 13 from the start. Converting a failed Chapter 7 wastes time you could have spent in a plan.

How is a Chapter 13 plan payment set?

Chapter 13 is a repayment plan supervised by a Chapter 13 trustee, the court officer who collects your monthly payment and pays creditors. The plan has to pay your projected disposable income, meaning what is left after allowed expenses, to unsecured creditors for a set period.

The length depends on your income. If your income is below the median, the plan is generally three years. If you are above it, which is usually the case when you failed the means test, the plan is generally five years, unless it pays all unsecured debts in full sooner.

The expenses come from the same rules. For above-median filers, the allowed expenses are figured under the same standards the means test uses. That calculation is the starting point, and then your actual secured debts, taxes and other obligations shape the final number; see how much you will pay in Chapter 13.

The plan also has to be proposed in good faith, and your case has to be filed in good faith. The trustee and the court check both.

Do I have to pay all my debts back in Chapter 13?

Usually not. A Chapter 13 plan does not have to pay unsecured creditors in full, as long as it pays them your disposable income for the plan period.

There is a floor. Unsecured creditors have to receive at least what they would have received if your property had been sold in a Chapter 7, which is called the liquidation test; here is how the liquidation test works.

When you finish the plan, the remaining balance on most unsecured debts is discharged, meaning wiped out by the court’s final order. For many people, credit card and medical creditors end up with a fraction of what they were owed.

Why can Chapter 13 be the better choice anyway?

Because Chapter 13 can do things Chapter 7 cannot.

It can save a house. A plan can catch up missed mortgage payments over a reasonable time, as long as you keep making the regular payment that comes due. Chapter 7 has no way to do that; see Chapter 13 to stop a foreclosure.

It can help with a car. A plan can pay missed car payments over time, and in some cases it can reduce what you owe on the loan, depending on when you bought the car; see the 910-day rule.

It protects your co-signers. Chapter 13 has a co-debtor stay: while your case is open, a creditor generally cannot collect a consumer debt from someone who signed with you, such as a parent who co-signed a car loan. The creditor can ask the court to lift that protection if your plan does not propose to pay the debt, and it ends if the case is closed, dismissed or converted to Chapter 7.

It handles some debts Chapter 7 leaves behind. Certain taxes and back child support or alimony are not wiped out in either chapter, but a plan lets you pay them, generally in full, over the life of the plan while collection is stopped.

Can I time my filing to qualify for Chapter 7?

Sometimes, and there is nothing wrong with planning around real changes in your income. The means test averages the last six full calendar months, so the date you file decides which months count.

A recent income drop. If you lost a job, lost hours or took a lower-paying position, the old pay stays in the average until it rolls out of the six-month window. Waiting a month or two can bring you under the median.

A one-time payment. A bonus, a large commission or a lump sum can push one month’s income up and inflate the average for six months. Filing before it arrives or after it rolls out can change the result.

A Chapter 13 that already started. You have the right to convert a Chapter 13 to Chapter 7 at any time. If your income falls later in the plan, conversion may be an option, though whether you then have to qualify for Chapter 7 depends on your income at that point and on how the court handles the question.

But don’t wait if a garnishment, a lawsuit or a foreclosure sale is coming. The emergency usually decides the timing, not the means test.

Can I game the means test?

No. Quitting a job, cutting your own hours, or moving income out of the six-month window on purpose to get under the median can backfire.

Even when you pass the test, the court can still dismiss a Chapter 7 if the case was filed in bad faith or if the totality of your financial situation shows abuse. The trustee will look at your pay history, your bank records and your tax returns, and an income drop with no real explanation invites questions.

Timing around real events is fine. Creating the events is not.

What should I do right now?

If you are above the median or a calculator told you that you fail, call me at (202) 448-5136. Bring your pay stubs or business income records for the last six full months, your last two tax returns and a list of your debts.

The consultation is free. I will run the full means test for your household in DC, Maryland or Virginia, tell you whether Chapter 7 is available now or later, and show you what a Chapter 13 plan would likely look like if it is not.

I handle bankruptcy in DC, in Maryland at the Greenbelt courthouse, and in the Eastern District of Virginia in Alexandria. Don’t wait. The six-month window keeps moving, and so do your creditors.