If your income is more than the published median amount you may still be able to do a Chapter 7 “straight bankruptcy.”
The “Means Test” and “Median Family Income”
Most people who file Chapter 7 cases have incomes less than the “median family income” amount. Those who do immediately pass the “means test” and as a result essentially qualify for Chapter 7.
The “median family income” amount of any particular state is the dollar amount at which half of the families in that state make less, and half make more than that amount. These “median” amounts are calculated by the U.S. Census Bureau for different size families within each state. The “median family income” amounts, which are adjusted periodically, are available at the U.S. Trustee’s website. Use the drop-down feature to pick the appropriate time period for when your case is being filed; the most recent one at the time this blog post is being written is for cases filed on or after May 15, 2015.
If You Are Above the “Median” Income Amount
The truth is that so much of the “means test” is maddeningly complicated, especially if your income is more than the “median family income” applicable to your family size and state. Here are some of the main things you need to know to begin to make sense of this.
- Even just determining your own family income to find out if you are above or below the “median family income” is more involved than you probably think. “Income” for “means test” purposes is NOT your last calendar year’s taxable income, or your employment income of the last 12 months, or anything similarly straightforward. Instead it includes pretty much every dollar that comes to you from all sources, with some very limited exceptions such as Social Security benefits. So it can include money that you may receive irregularly, such as child support, unemployment benefits, and help with household expenses from a housemate or adult child/parent living with you, for example.
- And instead of looking at the prior calendar year or the last 12 months, you count only whatever was received during the last SIX full calendar months before filing, and then doubling that to convert it into an annual amount. As a result if what you receive changes at all month to month, then your “income” also changes each month. So you could be over the allowed median income amount one month and then on the first day of the next month could be under that amount (if at that point an irregular chunk of “income” was received more than 6 months earlier). Only after going through all of this can you determine if you are above or below the “family median income” amount for your state and family size.
- If your family income IS above the applicable “median family income” amount then you still have a number of ways that you can pass the “means test” and file a Chapter 7 case.
- Deduct your living expenses from your monthly income to see if your “monthly disposable income” is low enough to pass the “means test.” The challenge is that determining what expenses you can subtract from your income involves understanding a very involved set of rules. That’s because some of allowed expense amounts are based on local standards, some on regional ones, and some on national ones, and only certain ones simply on what you actually pay for the expense! In any event, after your attorney applies those rules if the amount left over—the “monthly disposable income”—is less than $125, then it is low enough so that you can still file Chapter 7.
- If after deducting your allowed living expenses, your “monthly disposable income” is more than $208, then you can’t file under Chapter 7 unless you can show “special circumstances.”
- And what happens if your “monthly disposable income” (your “income” minus allowed expenses) is between $125 and $208? Then you multiply your “monthly disposable income” by 60. Compare that amount to the total amount of your regular (non-priority) unsecured debts. If the multiplied amount is NOT enough to pay at least 25% of those debts, then you can file Chapter 7.
So to summarize, although it’s easiest if your “income” is no more than your state and family size’s “median family income,” if it’s larger you can still file a Chapter 7 case under a number of different conditions. But as you can see that the law is ridiculously complicated. This is definitely an area where you need to get legal advice from an attorney who fully understands the law and deals with these matters every day.