The United States Bankruptcy Court requires all filers of bankruptcy to complete an income “means test”. Means testing is an objective way to determine eligibility to file bankruptcy by looking at an individual or couple’s recent income. While there are other factors that may prevent you from filing bankruptcy or may determine what type of bankruptcy you may file, the means test is the first step.
The means test is updated every year on April 1st to account for inflation and the increased cost of living. The increases are not dramatic, but usually hover around 2%. Nonetheless, if you are close to the threshold, a small change can be very important.
The means test for the Western District of Pennsylvania are the follow as of April 1, 2019 (note that it will vary by district):
Household of one $55,117.
Household of two $66,649
Household of three $82,518
Household of four $100,078
Household of five $109,078
Household of six $118,078
Household of seven $127,078
Household of eight $136,078
Each additional household member would allow an increase of $9,000.
A few important points. First, the amounts above relate to GROSS, BEFORE-TAX earnings. So, you can’t reduce the amount with deductions in your paycheck for taxes, retirement, and insurance. Most people think of their income in terms of the money left over after every paycheck, but that does not apply here. It’s all before tax.
Second, the numbers above are for your annual income, but the actual means test looks at the six months before filing. This can be confusing. The annualized numbers above are what is published, but you should actually divide them by two to determine what you can earn in the six months before filing. In other words, if you are a household of one, you can earn up to $27, 558.50 (gross) in the six months previous to filing.
Bankruptcy has a broad definition of “income”, so one-time bonuses and commissions may distort your income. Means test planning is an important part of bankruptcy law, so we may need to review your income closely.
One final issue may be what constitutes a “household member”? While I discuss this subject in more detail on this subject elsewhere in this blog, the short answer is “if they’re on the taxes, they are a household member”. If someone lives with you, but you cannot claim them as a dependent for the purposes of the IRS, you probably won’t be able to count them in bankruptcy.
Contact us if you have any questions about the bankruptcy means test, and whether you apply. I will be happy to review your income with you and see if the means test will limit your bankruptcy options.