If you're earning a good income and still cannot keep up, you may feel embarrassed about reaching out for help. Most of the professionals I work with did not get here through carelessness. A household earning $180,000 builds a life sized to $180,000: a mortgage, two car payments, childcare, private student loans, a 401(k) contribution that feels responsible. Then one thing changes, and every fixed cost that was reasonable a year ago becomes a problem at the same time.
You aren't alone. Below, I explain why it happens, how the law actually treats a higher income, and what a Chapter 13 plan involves day to day.
Why do people with good incomes end up needing bankruptcy?
Because a high income usually comes with high fixed costs, and fixed costs do not flex when income does. The pattern I see most is not a spending problem. It is a household budget that works well until one thing changes.
- Fixed costs sized to income. The mortgage, the cars, the tuition, and the insurance were all chosen when the income was stable. None of them shrink quickly.
- One income disruption. A layoff, a reduced bonus, a commission structure that changed, a partner who stopped working to care for a child or a parent. Six months of lower income can consume savings that took ten years to build.
- Tax debt. Self employment income, a business that did not withhold, or an equity payout that created a tax bill larger than the cash left over.
- Personal guarantees for a business. A small business loan, a commercial lease, or a line of credit that you signed personally. When the business fails, the debt lands on the household.
- Divorce. Two households on the income that used to support one, plus the cost of the divorce itself. I cover that intersection in bankruptcy and divorce in Colorado.
What usually comes next is twelve to thirty six months of working very hard to keep up. Zero percent balance transfers, then new ones when those expire. A 401(k) loan. Minimums that now exceed what is left after the mortgage. By the time most people call me, they already know the numbers do not work, and many have carried that worry alone for a long time.
If I earn above the median, am I forced into Chapter 13?
No. If you are above the median income for your household size in Colorado, it means you will have to complete the second part of the means test, not that Chapter 7 is off the table. The means test is the calculation in 11 U.S.C. § 707(b) that decides whether a Chapter 7 filing is presumed to be an abuse of the system.
The second part subtracts allowed expenses from your income: IRS standards for living costs, actual payments on secured debt like the mortgage and cars, taxes, health insurance, childcare, and several other categories. A household with a large mortgage, two car loans, and three children can look very different after that step than it did on the pay stub. The inputs matter, including when in the six month lookback you file. I walk through the full calculation in the Colorado means test, explained.
There is also an exception professionals should know about. The means test applies only when your debts are primarily consumer debts. If most of what you owe comes from a business, including personal guarantees you signed for one, the presumption of abuse does not apply at all. The court can still look at the totality of your circumstances, so this is not automatic, but it changes the analysis considerably.
How does Chapter 13 work for a higher income household?
Chapter 13 is a court supervised repayment plan: you pay a monthly amount to a Chapter 13 trustee, the trustee distributes it to creditors in the order the Bankruptcy Code sets, and the unsecured balance left at the end is discharged. For a household above the median, the plan terms are driven by formulas more than by preference.
The plan length
Under 11 U.S.C. § 1325(b)(4), the applicable commitment period is five years (60 months) if your income is above the median, unless the plan pays unsecured creditors in full sooner. Below the median it is three years. Most of my higher income clients are in a five year plan.
The payment
Disposable income is, in plain words, what the law says you have left each month after allowed expenses. For an above median household, § 1325(b)(3) requires that figure to be calculated using the same expense standards as the means test. The Supreme Court held in Hamilton v. Lanning (2010) that courts may account for changes in income that are known or virtually certain at the time the plan is confirmed, so the number is not purely backward looking.
The plan also has to pass a second test: unsecured creditors must receive at least what they would have received in a Chapter 7. If you own property that the exemptions would not protect, its value sets a floor under the plan. Your payment is the larger of the two figures, and it has to be enough to cover the items the plan must pay in full.
What the plan pays
- The trustee's fee and any attorney fees paid through the plan.
- Priority debts in full, including recent income taxes and any domestic support arrears. Paying a tax debt over five years with collection on hold is one of the more useful things Chapter 13 does.
- Secured debt you are keeping: mortgage arrears, and car loans if they are paid through the plan.
- Whatever remains goes to unsecured creditors like credit cards and personal loans, often at a fraction of the balance.
Car loans and mortgage arrears
If you are behind on the mortgage, the plan can cure the arrears over its full length while you make the regular payment going forward, under § 1322(b)(5). The plan generally cannot change the terms of a mortgage on your primary residence. In some cases a second mortgage with no equity behind it at all can be treated as unsecured debt, which depends on a current valuation.
Car loans can sometimes be restructured. If you bought the car more than 910 days before filing, the plan can often reduce the secured portion of the loan to the car's current value and set the interest rate under the formula the Supreme Court approved in Till v. SCS Credit Corp. (2004). A car bought within that 910 day window generally has to be paid in full, though the interest rate may still change.
Is there a debt limit for Chapter 13?
Yes, and higher income households are the ones most likely to reach it. Under 11 U.S.C. § 109(e), for cases filed on or after April 1, 2025, an individual qualifies for Chapter 13 only with less than $526,700 in unsecured debt and less than $1,580,125 in secured debt. Those figures adjust every three years.
From June 2022 to June 21, 2024, a temporary law replaced those separate caps with a single combined limit of $2,750,000. That law expired, and the separate caps returned. In 2026 the Senate passed S. 3977 and the House passed its own bill, H.R. 7730, each titled the Bankruptcy Threshold Adjustment Act and each restoring a combined $2,750,000 limit. The new limits should be in effect by the end of November 2026.
Unsecured debt adds up faster than people expect. Personal guarantees of business debt count if they are fixed in amount and not contingent. So do private and federal student loans. A professional with large student loans and a failed practice can exceed the unsecured cap with little credit card debt. The alternative then is an individual Chapter 11.
Chapter 7 or Chapter 13: how do they compare for this household?
| Question | Chapter 7 | Chapter 13 |
|---|---|---|
| Income test | Must pass the means test, or have primarily business debts | No means test to enter; income sets the payment and plan length |
| Length | About four to six months from filing to discharge | Usually five years for an above median household |
| Mortgage arrears | Cannot be cured through the case | Cured in installments over the plan |
| Car loans | Keep paying on the original terms, or surrender | Some older loans can be reduced to the car's value |
| Recent tax debt | Usually survives the discharge | Paid in full through the plan with collection on hold |
| Nonexempt property | The trustee can sell it | You keep it and pay its value through the plan |
| Property settlement debt from a divorce | Not discharged | Can be discharged at the end of the plan |
| Credit report | Up to ten years | Up to ten years by statute; the credit bureaus typically remove it at seven |
Will bankruptcy affect my professional license or my job?
For most professionals, no. Under 11 U.S.C. § 525(a), a government unit, including a state licensing board, may not deny, revoke, or suspend a license, or refuse to employ you, solely because you filed for bankruptcy or did not pay a debt that was discharged. Under § 525(b), a private employer may not fire you or discriminate against you in employment for the same reason.
There are honest limits. Several federal appeals courts have read § 525(b) as not covering hiring decisions by private employers, so a prospective employer is on firmer ground than your current one. Some regulated roles, particularly in finance, ask financial questions during licensing or background review. In my experience a filing reads better there than a history of collections and charge offs.
Security clearances deserve a direct answer. The standard federal clearance questionnaire, the SF 86, asks whether you have filed for bankruptcy in the last seven years, and financial considerations are one of the adjudicative guidelines. Bankruptcy is not an automatic disqualifier. Adjudicators generally look for unresolved debt, the circumstances that caused it, and whether you were honest about it. Concealment is the problem that tends to cost people clearances, not the filing itself. If you hold a clearance, tell me at the start and disclose accurately.
What does Chapter 13 do to my credit and my ability to buy a house?
It shows on your credit report, and it does not end your ability to borrow. Federal law allows a bankruptcy to be reported for up to ten years from filing. In practice, the credit bureaus typically remove a completed Chapter 13 seven years after filing. If your report already shows late payments and maxed out balances, most clients see their scores start to recover once the case is filed and the accounts stop reporting new delinquencies.
Mortgage eligibility is better than most people assume. Under HUD's FHA guidelines, a borrower can qualify for an FHA loan during a Chapter 13 plan after at least twelve months of on time plan payments, with written permission from the court. Under Fannie Mae's guidelines for conventional loans, the waiting period is two years from a Chapter 13 discharge and four years from a dismissal. Lenders add their own requirements, so treat these as the floor.
What is it actually like to live in a five year plan?
Calmer than what you are living with now, and more structured than you are used to. The creditor calls stop when the case is filed. You make one payment to the trustee, sometimes through a payroll deduction, and you know that number in advance for sixty months.
You may have to send the trustee your tax returns each year, and a significant raise or bonus may increase your plan payment. New credit, such as a replacement car, requires approval first. If your circumstances change, a job loss or a new child, the plan can be modified, which requires updated income and expenses. You live on a budget the court approved, and for a household used to deciding for itself, that takes some adjustment. The Chapter 13 page covers what happens when plans fail and how to prevent it.
The other side is that the plan ends. At the end of month sixty, the remaining eligible unsecured debt is discharged, the mortgage is current, and the tax debt is paid. Most clients describe the first year as an adjustment and the rest as ordinary life with a known payment in it.
What should I do before deciding?
First, please avoid moves you cannot undo. Do not cash out retirement accounts, which bankruptcy protects, to pay credit cards, which bankruptcy may discharge. I explain why in should you cash out your 401(k) to pay off debt. Do not repay family members ahead of other creditors, and do not take on new debt you do not intend to repay. If you are weighing a settlement program instead, read debt settlement versus bankruptcy first.
If this sounds like your household, I would be glad to talk with you. Our first conversation is a paid Strategy Session. I will go through your actual income, the means test with your real numbers, the debt limits, the house, the cars, and the retirement accounts, and you will leave knowing which chapter fits and what the payment would likely be. How I work describes what to gather beforehand, and the contact page is where to schedule it when you are ready.
