It is extremely likely the amount of your income will not disqualify you from filing bankruptcy. Almost nobody who needs financial relief is disqualified from getting some kind of bankruptcy relief regardless of their income. Indeed, most people are able to file the kind of bankruptcy that is best for their circumstances.
WHAT IS “MEDIAN INCOME”?
Under the “means test,” most people facing financial challenges are able to file either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts” because their income is under the published median income for their state and family size. Here are the current median income amounts for California residents (effective at the time of this blog post):
4 People *
*Add $8,100 for each individual in excess of 4.
“Income” for purposes of the means test is not the same as gross taxable income. It focuses on the six full calendar months before filing bankruptcy, and includes almost all sources of income (except Social Security). If your income as calculated under this test is less than the above median income amounts, then your income will almost certainly not be any hindrance in filing bankruptcy.
WHAT IF MY INCOME IS OVER THE “MEDIAN” AND I WANT TO FILE UNDER CHAPTER 7?
There is a good chance that you would still be able to do so:
- You can avoid the means test altogether if more than half of the dollar amount of your debts are business debts—they were NOT incurred “primarily for a personal, family, or household purpose.”
- As mentioned above, when comparing your income for the means test against the median income amounts, your income is based on the money you received during the previous six-full-calendar-month period. This means that if the money you’ve received has been irregular, you may have some control over this calculation of your income for this purpose since the timing of your filing changes which 6-month period of income applies. So, careful timing of filing may be able to reduce your income below the median income amount applicable to you.
- Even if your income is indeed higher than your applicable median income amount, that’s just the beginning of the means test. You may still qualify based on the rest of the means test.
IF I TRULY AM ABOVE MEDIAN INCOME, CAN I STILL QUALIFY TO FILE A CHAPTER 7 CASE?
Here are the rest of the steps of the means test. Each step gives you another opportunity to pass it and qualify for Chapter 7. Caution: these additional steps are relatively complicated:
- You can deduct certain living expenses from your monthly income as calculated under the means test to see if your “monthly disposable income” is low enough. The rules for determining precisely which expenses you may deduct and how much for each are extremely detailed and beyond the scope of this blog post. To give you an idea, the allowed amounts for some types of expenses are based on what you actually spend, some are based on tables of local standards amounts, others on national standards. What’s important for our purposes here is that after applying those rules, if the amount left over—the “monthly disposable income”—is no more than $125, then you can still file a Chapter 7 case.
- If your “monthly disposable income” after deducting expenses is between $125 and $208, then apply the following formula: multiply that “monthly disposable income” by 60. Compare that amount to the total 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.
- If after applying the above formula you CAN pay at least 25% of those debts, OR if after deducting your allowed living expenses the resulting “monthly disposable income” is more than $208, then you may still be able to file under Chapter 7 by showing “special circumstances.” Examples of appropriate “special circumstances” given in the Bankruptcy Code are “a serious medical condition or a call or order to active duty in the Armed Forces.”
SO WHAT HAPPENS IF I “FAIL” THE MEANS TEST BUT NEED BANKRUPTCY RELIEF?
Most people pass the means test and can file under Chapter 7 if that is the option that’s best for them. If you do not believe you will pass it based on what you’ve read in this blog post so far, be sure to see a qualified bankruptcy attorney. As relatively detailed as the above explanation has been, there is much more to applying the means test to your unique circumstances. So you may still qualify if you meet with an attorney very familiar with the means test (as any highly experienced bankruptcy attorney should be).
But if you truly do not pass the means test, you would most likely be able to get significant relief through a Chapter 13 “adjustment of debts” bankruptcy. Indeed, for many people Chapter 13 is the better option regardless whether they are forced to because of the means test. Again, see a bankruptcy to find out.
WHAT IF MY INCOME IS OVER THE “MEDIAN” AND I WANT TO FILE UNDER CHAPTER 13?
The impact of the median income issue is much more straightforward under Chapter 13. And it can mean the difference of many thousands of dollars to you. Being under or over median income determines whether the minimum length of your Chapter 13 plan will be 3 years or 5 years.
In some cases, that makes a lot of difference, both in terms of how long your case lasts and how much you pay to your creditors. But in other cases this makes no difference. That’s because in some Chapter 13 cases you WANT it to last longer to give you more time to pay certain debts you want to pay—such as catching up on a mortgage arrearage or paying some recent income taxes that can’t be written off—while being allowed to pay less per month to accomplish that.
Again, this is definitely something that you want a seasoned bankruptcy attorney to counsel you about. If Chapter 13 is the right solution for you, your attorney will be able to determine if being over median income matters in your case, if so to explain its financial impact, and possibly advise you whether there is a way to reduce your income below the median.
Most people qualify for either Chapter 7 or Chapter 13—whichever is better for them and their circumstances—without worrying about their income. If Chapter 7 is the better alternative for you, you may still qualify even if your income appears to be over the applicable median income. And under Chapter 13, while your income definitely impacts your case, being under or over median may or may not change how much you pay your creditors.