“Income” is not what you think it is—it’s much broader than usual and fixates on the 6 full calendar months before your bankruptcy filing.
Our last blog post a couple days ago was about an upcoming cost of living adjustment of median family income amounts. This adjustment is going in effect for bankruptcy cases filed on and after April 1, 2016. (See Section 101(39A) of the Bankruptcy Code.) These median family income amounts are important because they can determine whether you can pass the “means test” and qualify for a Chapter 7 “straight bankruptcy” instead of a Chapter 13 “adjustment of debts.”
That’s important because a consumer Chapter 7 case usually take only 3 or 4 months to finish. It usually does not require you to pay anything to most of your creditors. In contrast a Chapter 13 case usually takes 3 to 5 years, and requires you to pay all you can afford to your creditors throughout that period of time.
The easiest way to pass the “means test” is for your family “income” to be no greater than the median family income amount for your family size in your state. Here is a table of all the median family annual income amounts effective starting April 1, 2016 for every state and territory in the United States. The table includes different median income amounts for families of different sizes, from 1 to 4 people; for larger families add $8,400 for each additional family member beyond 4.
How Do You Compare Your “Income” to These Published Median Family Income Amounts?
It’s trickier than you might think to calculate your “income” to find out if it is no more than the published median income amount for your state and family size. Indeed we put “income” in quotes because that word has a very specific meaning for “means test” purposes.
“Income” includes money received during and only during a rather unusual time period. And “income” includes certain sources of money received during that time period but excludes other sources of money.
The “Income” Time Period
The period of time during which your “income” is counted for the “means test” is precisely the last SIX FULL CALENDAR months prior to the day you file bankruptcy.
Because you count only money received during the prior FULL calendar months, you do NOT include any money received during the month your bankruptcy is filed. For example, if you file on a April 15, you don’t count any money received from that April 1 through April 15.
Because you count money received only the last SIX full calendar months, you don’t count any received just before that. For example, if you file bankruptcy on a December 15, you don’t count any money received on or before that May 31, even though it’s in the same calendar year. That’s because only money during the 6 prior full calendar months—from June 1 through November 30 of that year—counts.
What’s Included in and Excluded from “Income”
Virtually all forms of money received or paid on your behalf is included other than Social Security. The statutory language says to include
income from all sources that the debtor receives… without regard whether such income is taxable income,… and… includes any amount paid to any entity other than the debtor… on a regular basis for the household expenses or the debtor or the debtor’s dependents… but excludes benefits received under the Social Security Act.”
This may include income and payments from some unexpected sources.
As expected, all income from your employer is included—all gross wages or salary, as well as any tips, overtime, shift differentials, and commissions, WITHOUT subtracting any tax or other deductions.
If you operate a business or farm, have a profession, or have income from real estate, include all gross receipts during the 6-month time period. You can subtract operating expenses of that business, farm, profession or real estate, but only to the extent that they are “ordinary and necessary” ones. If the expenses are more than the income, you can’t use a negative “net” amount; just put $0.
There’s a line for entering all income in the form of “interest, dividends, and royalties.” If you own stock or other investments in which the dividends or other proceeds are automatically reinvested, include those dividends or other investment proceeds as income.
Include all pension and retirement income, other than Social Security payments (So include all non-Social Security governmental and private retirement income, as well as from 401(k)s and IRAs of any type.
Include unemployment compensation. Arguably some kinds of unemployment benefits are “benefits received under the Social Security Act” and so perhaps should be excluded. Talk with your attorney about this issue is locally enforced. Given how modest unemployment compensation tends to be, you may be well under the median family income amount for your family size and state even if it is treated as “income.”
Social security disability benefits are not included, but private disability insurance benefits are included.
Include any amounts paid by any other person or entity on a regular basis for your household expenses. It doesn’t matter whether the payments are made monthly, quarterly, annually or on any other regular basis. It doesn’t matter whether the payments are made without any written agreement. This includes payments from a roommate or housemate, a partner, parent or other relative, whether or not this person is living with you. Include child and spousal support. Include payments made directly to creditors on your behalf, such as for your apartment rental or your vehicle loan payments or insurance, or anything else.
Include other odd sources of income, such as any net gambling gains, cash gifts, proceeds of any litigation (including your share of any class action proceeds). Include any trust income.
But exclude income tax refunds and any repayments received on a debt owed to you.
Add up all of such sources of income during the 6 full calendar months before your anticipated Chapter 7 filing. Then multiply that total by 2 to get the annualized amount. Compare that amount to the table of new median family income amounts referred to above. If your “income” is no more than the median family income amount in the table for your family size, then you pass the “means test” the easiest way to pass it, and you qualify for Chapter 7. (You might still pass the “means test” if your “income” is higher than the applicable “median family income” amount, but it’s more challenging and risky.)
But what if when you try to compare your “income” to the median family income for your state and your family size, you don’t know which state to use or which family size?
Which state’s median income amounts do you use if you’ve moved recently, or if you are married but maintain households in two states?
What’s your family size if you have children who didn’t live with you all year, or are living with you but partly support themselves?
And if you’re married but only one spouse is filing bankruptcy, how do you factor in the other spouse’s income and expenses?
We’ll address these questions in the next blog post.