Bankruptcy: High-Income Debtors

File BankruptcyDebt can be a problem for anyone, including people with high income.  A good job with a high salary is not a guarantee of financial prosperity.  High-income debtors can get sick, divorced, or experience financial loss.  Whatever the reason may be, no matter what your salary, debt can get out of control.

Bankruptcy allows debtors a fresh start.  However, a bankruptcy case for a low-income debtor is a much different thing than for a high-income debtor.  Low-income debtors can usually file Chapter 7 bankruptcy.  Chapter 7 allows the filer to discharge many types of debts with no payment.  The cases last 3 to 4 months and most debtors are fully exempt, meaning they lose no assets during the bankruptcy process.

High-income debtors are usually not eligible for relief under Chapter 7 bankruptcy.  Most of them must file a Chapter 13 bankruptcy case, which means making payments to a trustee for five years.  The trustee takes the payments and uses the money to pay off the creditors listed in the case.  Unsecured creditors are paid with no interest, so even though the debtor has to pay their creditors they still save a significant amount of money.

Since high-income debtors are generally required to pay their creditors, it is very important that they not delay in filing a bankruptcy case.  Basically, the more they owe the more they have to pay back, and debt has a way of growing.  For example, consider a debtor with $50,000 in credit card debt.  If the only debts being paid in the bankruptcy case are credit cards, then the debtor’s plan payment will be approximately $917 a month.  However, if that same debtor delays filing for two and a half years, and the debt is incurring 30% interest per year, then the debtor will owe $100,000 at the time of filing and the plan payment each month will be $1,834.  As a general rule, high-income debtors can benefit greatly from the bankruptcy process, but it is important that they file early before the debt has a chance to grow too much.