Income Limitations On Chapter 7 Bankruptcy
In analyzing the potential consequences of a personal bankruptcy, one of the questions is whether the debtor has too much income to qualify for Chapter 7. If a debtor has sufficient income to pay necessary household expenses, and still have money left over, Section 707(b) of the Bankruptcy Code could be used to have the case dismissed as “abusive.”
I am bankruptcy lawyer Peter Scribner, Esq. High-income bankruptcy cases filed in the bankruptcy court in Rochester, New York, are always scrutinized very carefully, and I am fully familiar with the challenges faced by these debtors (see the Kornfield case, described below).
If you are a high-income debtor (single person earning over $45,000 per year, family earning over $65,000 per year), please contact my office for an expert analysis of your bankruptcy options.
Determining Your Eligibility For Bankruptcy Via The Means Test
Certain income brackets are ineligible for Chapter 7 bankruptcy. This issue is known as the “means test” of bankruptcy. Your income is actually only part of the analysis, but it is the starting point. If you do not pass the means test, you will need to file for Chapter 13 bankruptcy.
So, How Does The Means Test Work?
Consumer cases only: First, this test only applies in consumer bankruptcy cases. If a majority of your debt is not consumer debt, it does not matter what your income is. For bankruptcy purposes, your home mortgage is considered consumer debt; taxes are not consumer debt. If you used personal credit cards for business purposes, that is considered business debt.
Means test income: First, we calculate all your household income for the six months prior to filing, ending the month prior to filing. Example: if you file in August, the six months is Jan. 1 to July 31; for a September filing, it is Feb. 1 to Aug. 28. For a debtor married and living with a spouse, we include income from both spouses, even if only one is filing bankruptcy. For the means test, we do not include social security or veteran’s disability payments as income. We do include pensions, unemployment, workers’ compensation, child support and all other income sources.
Next, we divide the previous six months’ income by six, to get a monthly amount. This is called current monthly income or CMI.
Then we multiply CMI by 12 to get an annual income figure. We compare this annual figure with the median income for a similar size family in New York State.
If the debtor’s annual income by this calculation is below the median for a similarly sized New York family, that debtor passes the means test (however, a further totality of circumstances income analysis must also be conducted; more on that below).
Family size: One means test issue is what, exactly, is the debtor’s family size. This can be complicated in split families where a debtor pays support for kids living elsewhere, or with unmarried couples or children over 18 living at home. In general, family size is the debtor, the spouse and everyone who depends, at least in part, on the debtor for support.
Income variations: Another issue is a debtor who has variations in income during the year. Say a teacher only receives paychecks from September through June. If a case is filed, say, in March, the previous six months will overstate the teacher’s income (October thru February is 50% of the year, but 60% of the debtor’s income). If that teacher filed in September, the means test income for the previous six months (April thru August) would be much lower.
Self-employment and the means test: Self-employed debtors have to calculate their means test income carefully. They need to account for all business income (gross receipts) and all business expenses for the previous six months, a more complicated analysis than simply adding up six months’ paychecks.
Means test expenses: If a debtor’s household income is above the New York state median, the means test then requires completion of a complicated expense calculation. These expenses are based on those the IRS would allow a taxpayer who wishes to pay back taxes over time. These expenses are mostly average expenses for similarly sized households; some of these are national averages (like food and clothing), some are regional (like transportation) and some are local averages (like housing).
The bankruptcy means test incorporates this IRS expense system and then makes several changes to it. Only an experienced bankruptcy practitioner like myself is qualified to complete the expense calculations for an above-median income bankruptcy debtor. If the debtor has money left over after allowing means test expenses, the case could be dismissed as abusive. This rarely happens in western New York cases.
Totality of circumstances test: Even if the debtor has below-median income or if the means test expenses exceed income, there is a further analysis, the totality of circumstances test. Very briefly, this test analyzes actual ongoing income (not just the arbitrary income of the last six months) and actual house expenses (not just means test IRS-type expenses). Social Security and child support are included as income under this test.
If actual income exceeds actual necessary expenses, the analysis looks for aggravating and mitigating factors. Mitigating factors could include loss of employment, wage cuts or medical problems. Aggravating factors could include reckless spending. If income exceeds expenses and aggravating factors exceed mitigating factors, the case could be dismissed as abusive.
Alternatives, not exclusive: The means test of Bankruptcy Code Section 707(b)(2) and the totality of circumstances test of Section 707(b)(3), are alternatives, not mutually exclusive. Usually, the Office of the United States Trustee, which brings most of these abuse motions, will argue that either one will apply, and either one can result in a case being dismissed. For above-median income debtors, it is possible a creditor could file a high-income abuse motion.
Income analysis and Chapter 13: The totality of circumstances test compares what would happen if a high-income Chapter 7 debtor filed a Chapter 13 case instead; would creditors in that hypothetical Chapter 13 receive a significant dividend? So, to do a full-income analysis in a high-income Chapter 7 case, an attorney must also be fully familiar with Chapter 13. I represent debtors in both Chapter 7 and Chapter 13 cases.
Did All That Make Sense?
If not, do not worry. The big take away is this: Chapter 7 bankruptcy is only available to persons with typical or low incomes. If you are trying to decide what side of this line you fall on, you should contact my office. I can help determine which form of bankruptcy you qualify for. Take a minute and call me at 585-643-7109.