Making Sense of Bankruptcy: Is My Income Low Enough to Pass the “Means Test”?
Most people qualify to file a Chapter 7 “straight bankruptcy” by having low enough “income.”
Our last blog post a couple days ago was about choosing between Chapter 7 and Chapter 13. As we said, to qualify for filing a Chapter 7 case your income needs to be low enough or your expenses high enough to pass the “means test.” Most people who file a Chapter 7 case have income low enough so that they pass without needing to get to the expenses part of the test. Here’s how to determine whether your income is low enough.
We’ll show you while explaining the following sentence:
To determine if your “income” is low enough to pass the “means test,” find out the published median income amount for your state and family size, add up all the money you’ve received from virtually all sources during the last 6 full calendar months, then multiply that amount by 2 and then see if it is no more than the applicable median income amount.
More on the “Means Test”
Please understand that there are many twists and turns to the “means test,” including ways to pass it and to qualify for a Chapter 7 case even if your income is ABOVE the applicable median income amount. So if your income is higher, you may still be able to file a Chapter 7 case. Be sure to talk with an experienced bankruptcy attorney before making any assumptions one way or the other.
Even if you can’t file a Chapter 7 case because of your income or because you can’t pass the “means test” overall, you would still likely qualify for a Chapter 13 adjustment of debts, which under many circumstances is a better solution anyway.
Going back to passing the “means test” by having low enough income, be aware that this can be trickier than may appear at first. So be sure you discuss with a bankruptcy attorney whatever calculations you make from this blog post.
Your Applicable Median Income Amount
The median income for a group of people is the dollar amount at which half of that group has a lower income while the other half has a higher income. The median income amounts for each state, and for each family size within each state, are determined by the U.S. Census Bureau and are updated periodically. Here is a table showing these income amounts for the period of time starting May 15, 2015. (If it’s been a while since that date, be sure to check this website to see if those amounts have been updated.)
By way of example, the table shows that the median income amount for a family of three people is $69,600. We’ll apply this example through the rest of this blog post.
Money Received from All Sources Other than Social Security
“Income” for purposes of the “means test” is broader than what you are likely thinking. It can include more than just income from work, or taxable income. It includes virtually all money you received from virtually all sources during the applicable six-month period. So it includes child support and alimony payments received, as well as money you get for household expenses from an unmarried partner, housemate, parent or adult child. Also include any net income from operating a business (after subtracting ordinary and necessary operating expenses), any net income from rental property, unemployment benefits and pension/retirement income–but NOT Social Security or any other benefits under the Social Security Act.
“Income” during the Last Six Full Calendar Months
List all money received from all these sources during the following very precise period of time: the last 6 full calendar months from the date your bankruptcy case will be filed. So for example if you would file a Chapter 7 case on May 15, 2015, the pertinent period of time would be November 1, 2014 through April 30, 2015.
For example, if a family of three people included one parent who receiving a monthly salary of $4,500, and another parent who regularly received $550 per month in child support plus received unemployment benefits through all of 2014 of $1,500 per month, their total income for the November 1 through April 30 6-month period would be $33,300 ($27,000 + $3,300 + $3,000).
Multiply by 2 and Compare to the Applicable Median Amount
After carefully determining the exact amount of “income” during the correct 6-month period, multiply that income amount by 2 to convert that half-year amount into a full-year one. Then compare that amount to the published one you found on the website provided above.
If your calculated income amount is no more than the applicable published one, you pass the “means test” and, except in very unusual circumstances, you qualify for filing under Chapter 7. You don’t have to complete the expenses portion of the “means test” or do anything else to pass it.
Using our example, multiplying $33,300 by 2 equals $66,600. Since that is less than the published median income amount of $69,600 for this family of three in their state, if they would file a Chapter 7 case on May 15, 2015 (or on any date that month) they would pass the “means test” and qualify to file a Chapter 7 case.
Timing of Filing Can Make the Difference
Because of how “income” is calculated for “means test” purposes, your qualifying “income” can change each month as long as your “income” is not identical each month. The beginning of each month shifts the 6-calendar-month period of “income” forward by one month. As that “income” goes up and down each month, it could go above and below the applicable median amount. So the timing of the filing of your Chapter 7 case can determine whether your income qualifies you to file that case or not.