Most people easily pass the means test based on their relatively low income. Timing plays a huge role in calculating your income.
The Means Test
To file and complete a Chapter 7 “straight bankruptcy” case you have to qualify for it. The main hurdle in qualifying is what’s called the “means test.” That is, to qualify for Chapter 7 you have to show that you don’t have too much “means.”
You do that mostly through your income. The start, and for most people the end, of the means test involves comparing your income to a set median income amount. If your income is no more than median income amount for your family size in your state, you pass the means test.
Being able to file a Chapter 7 case by passing the means test is usually very important. That’s because if you have more “means” (income) than you’re allowed, you usually have to file a Chapter 13 case instead. That involves a 3-to-5-year payment plan, instead of the 3-4-month Chapter 7 procedure. Chapter 13 is great in the right circumstances. It has great tools unavailable under Chapter 7. But if you just need the quick relief of Chapter 7 being forced instead into a Chapter 13 case is a serious setback.
The Timing Focus of the Means Test
As we said above, the easiest way to pay the means test is for your income to be no larger than the published “median income” amount for a family of your size in your state. If your income is no more than that then right away you’ve passed the test. You’ve overcome the biggest qualification for filing a Chapter 7 case.
But your income for purposes of the means test is not calculated in any way you might think. In particular the timing aspect of how your income is calculated is unusual.
Your income for purposes of the means test is not based on your income for the previous calendar year, or prior 365 days or 12 months. It’s not based on any kind of annual basis. Instead it’s based on your income of the six full calendar months prior to the filing of your case.
- For example, if you and your bankruptcy lawyer file your case during any day in October 2017, the pertinent prior-six-full-calendar-month period is from April 1 through September 30, 2017. After adding up the income received during that six-month period multiply it by two for the annual amount.
- Your income for the means test is not just your “taxable income.” Instead include just about every bit of income or money you receive from all sources during that period of time. This includes irregular sources of money such as child and spousal support payments, insurance settlements, unemployment benefits, and bonuses. However, exclude all types of social security-based income.
The Median Income Amount for Your Family Size and State
The last step is to compare your income amount as you just calculated to the median income for your state and your size of family. You can find that median income amount in the table that you can access through this website. (This median income information gets updated every few months so be sure to use the current table.)
If your income, as calculated in this distinct way, is no more than the median income for your state and family size, then you’ve cleared the means test hurdle! You can very likely proceed through Chapter 7 bankruptcy.
Next time we’ll focus on the opportunities presented by this quirky way of calculating income for the means test.