Most people considering Chapter 7 “straight bankruptcy” have low enough income to qualify. Find out if you do.
The “Means” Part of the “Means Test”
When Congress passed the last major set of changes to the bankruptcy laws nine years ago, it explicitly said that wanted to make it harder for some people to file Chapter 7. The idea was that those who have the means to pay a significant amount of their debts should do so. Specifically, those who can pay a certain amount to their creditors within a three-to-five-year Chapter 13 payment plan ought to do so, instead of just being able to write off all their debts in a Chapter 7 case.
How the Law Determines Whether You Have Too Much “Means”
The “means test” measures people’s “means” in a peculiar, two-part way, the first part based on income, the second part based on expenses.
The income part is relatively straightforward; the expense part involves an amazingly complicated formula of allowed expenses.
The good news is that if your income is low enough on the income part of the “means test,” then you’re done: you’ve passed the test and can skip the rest of the test. The other good news is that most people who want to file a Chapter 7 case DO have low enough income so that they do pass the “means test” based simply on their income.
Is YOUR Income Low Enough to Pass the “Means Test”?
Your income is low enough if it is no higher than the published “median income” for a household of your size in your state. You can look at your “median income” on this website (for bankruptcy cases filed on or after April 1, 2014).
A Peculiar Definition of “Income”
Here’s what you need to know to compare your “income” (as used for this purpose) to the “median income” applicable to your state and family size:
1. Determine the exact amount of “income” you received during the SIX FULL calendar months before your bankruptcy case is filed. It’s easiest to explain this by example: if your Chapter 7 case is filed on March 25, 2014, count every dollar you received during the six-month period from September1, 2013 through February 28, 2014. After coming up with that six-month total, divide it by six for the monthly average.
2.When adding up your “income” include all that you’ve acquired from all sources during that six-month period of time, including unconventional sources like child and spousal support payments, insurance settlements, unemployment benefits, and bonuses. But EXCLUDE any income from Social Security.
3. Multiply your six-month average monthly income by 12 for your annual income. Compare that amount to the published median income for your state and your size of family in the link provided above. (Make sure you’re using the current table.)
If your “income”—calculated in the precise way detailed here—is no more than the median income for your state and family size, then you have passed the “means test” and can file a Chapter 7 case.
But if your income is higher than that, you may still be able to pass the “means test” and file a Chapter 7 case. That’s covered in the next blog post.