The Income Component of the Bankruptcy Means Test
Under the “Means Test established by the 2005 revisions to the federal bankruptcy laws, certain people needing bankruptcy protection may be disqualified from a Chapter 7 bankruptcy, and in a Chapter 13 bankruptcy must make calculated minimum payments to unsecured creditors over a required five year period. The Means Test was intended to catch people with high income and abnormally high expenses and force them to pay based on the same formula that the IRS uses in calculating repayment plans for those who owe federal taxes.
The Means Test does not apply if one of the following is true:
- Your debts are primarily business or business related debts;
- You are a disabled veteran and your debts occurred primarily while you were on active duty in the armed forces, or in the armed forces reserves or National Guard or within 540 days after the end of that service
- Your “current monthly income” based on the past 6 months is less than the median income in the state where you life, for your size household.
“Current monthly income” under the Means Test is the average monthly gross income for the six month period prior to the filing of your petition. This includes all forms of income (other than Social Security), whether taxed or not, such as:
- Gross wages, tips and salaries, including bonuses and commissions (before payroll deductions)
- Gross business or investment income
- Income from retirement plans
- Disability payments other than Social Security disability
- Regular contributions by others to cover household expenses
Generally, the court or the trustee will look at the total gross income for the six month period and divide by six.
Once your current monthly income is calculated, the bankruptcy court or the trustee will compare your average current monthly income with the median in your state, also taking into account your household size. (The median is the number at which half the households earn more and half earn less). If you fall below the median, you automatically pass the means test.
If your income exceeds the median, you may still be able to discharge debts through Chapter 7, but the computation will be far more complex. At that point, a complicated multi-part formula of allowed expenses is applied. If after deducting the allowed expenses, the amount remaining (called “disposable income”) is at or below what is allowed (again based on a multi-part formula), you can still qualify under Chapter 7.
Needless to say, this is an area where experienced and qualified legal advice is essential.
Contact Neuner & Ventura, LLP
At Neuner & Ventura, LLP, we know the personal challenges that come with a potential bankruptcy filing. We offer a free initial consultation to every client. We do, however, reserve the right to charge a fee to review any work done by another attorney.
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