Pass the Means Test by Filing Bankruptcy in 2018

Posted by Kevin on December 10, 2018 under Bankruptcy Blog | Comments are off for this article

The timing of your bankruptcy filing can determine whether you qualify for quick Chapter 7 vs. paying into a Chapter 13 plan for 3-5 years.

The means test requires people who have the “means” to do so, to pay a meaningful amount on their debts. If you don’t pass the means test you’re effectively stuck with filing a Chapter 13 case.

Be aware that a majority of people who need a Chapter 7 case successfully pass the means test. The most direct way to do so is if your income is no larger than the published “median income” amounts designated for your state and family size. What’s crucial here is the highly unusual way the means test defines income. This can create potential timing advantages and disadvantages.

The Means Test Definition of Income

When considering income for purposes of the means test, don’t think of income as you normally would. Instead:

1) Consider almost all sources of money coming to you in just about any form as income. Included, for example, are disability, workers’ compensation, and unemployment benefits; pension, retirement, and annuity payments received; regular contributions for household expenses by anybody, including a spouse or ex-spouse; rental or other business income; interest, dividends, and royalties. Pretty much the only money excluded are those received under the Social Security Act, including retirement, disability (SSDI), Supplemental Security Income (SSI), and Temporary Assistance to Needy Families (TANF).

2) The period of time that counts for the means test is exactly the 6 full calendar months before your bankruptcy filing date. Included as income is ONLY the money you receive during those specific months. This excludes money received before that 6-month block of time. It also excludes any money received during the calendar month that you file your Chapter 7 case. To clarify this, if you filed a Chapter 7 case this December 15th, your income for the means test would include all money received from exactly June 1 through November 30 of this year.

The Effect of this Unusual Definition of Income

This timing rule means that your means test income can change depending on what month you file your case.

So if you receive an unusual amount of money anytime in December, it doesn’t count if you file a Chapter 7 case by December 31.  Think year end bonus. Remember, if you file bankruptcy in December, only money received June through November gets counted.

So let’s say you got an extra $1,500 as a bonus in December. If you file in December that extra doesn’t count. But if you wait until January to file, December money is counted because the pertinent 6-month period is now July 1 through December 31. That extra $1,500 gets doubled, increasing your annual income by $3,000. That could push you above the designated “median income” for your state and family size.  Then, you may not qualify for Chapter 7.

Conclusion

It is a fact that most people wait way too long before their initial consultation with a bankruptcy lawyer.  Our advice is to consult early so you can know your options and  possibly formulate a strategy which can save you money over the long haul.

What is “Median Family Income,” and If You’re Making More Than That Can You Still File a Chapter 7 Case?

Posted by Kevin on May 14, 2013 under Bankruptcy Blog | Be the First to Comment

If your family income is more than the “median family income,” you may still be able to file under Chapter 7.

The “median family income” within a particular state is the dollar amount at which half of the families in that state make less, and half make more than that amount. “Median family income” amounts are calculated for different size families within each state. This information, which originates from the U.S. Census, is available on a table downloadable at the U.S. Trustee’s website. Make sure you’re looking at the most recent table.

Let’s be clear: if your income is at or less than the “median family income” for your size family,  in your state, then you are eligible to file under Chapter 7. (Other separate hurdles may need to be addressed but those go beyond today’s blog.)

It only gets complicated if your income is more than the applicable “median family income.” As stated in the very first sentence above, you still may be able to file a Chapter 7 case. Here what you need to know to help make sense of this:

A. Simply figuring out your own family income to find out if you are above or below the “median family income” is much harder than you’d think. It’s not last year’s gross taxable income, or anything commonsensical like that.  It’s instead based on a much broader understanding of income—basically every dollar that comes to you from all sources, with some very limited exceptions. And it’s based only on the income received during the last 6 full calendar months before filing, and then converting that into an annual amount. And that’s the easy part!

B. If your family income is higher than the applicable “median family income,” then you still have a number of ways that you can file a Chapter 7 case:

1.Deduct your living expenses from your monthly income to see if your “monthly disposable income” is low enough. The problem is that figuring out what expenses are allowed to be deducted involves understanding a tremendously unclear and complicated set of rules. In any event, after your attorney applies those rules, if the amount left over—the “monthly disposable income”—is no more than $117, then it is low enough so that you can still file Chapter 7.

2. If after deducting your allowed living expenses, your “monthly disposable income” is more than $195, then you can’t file under Chapter 7, except by showing “special circumstances.”

3. And what happens if your “monthly disposable income” is between $117 and $195? That’s where the real fun begins. Multiply your specific “monthly disposable income” by 60. Compare that amount to the total amount of your regular (non-priority) unsecured debts. If the multiplied amount is not enough to pay at least 25% of those debts, then you can file Chapter 7.

So to go back to the question in the title of this blog, you can see that even if your income is higher than your state and family size’s “median family income,” you can still file Chapter 7 under a number of different financial conditions. You can also see that the law is convoluted. This is definitely an area where you need to get solid legal advice.