means test

Annual Means Test Update (April 2019)

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.

Showing Your Income For Bankruptcy

Proof of income is an important part of the bankruptcy filing process. You must show the bankruptcy court exactly how much money you have made in the six months before filing. Your income is "means tested", which determines whether you have the ability to pay your creditors, based on your household size and income.

The means test amounts are set by the court, and are periodically updated. This is explained in greater detail elsewhere in this blog. The important issue for now is how do you show and calculate your income? If you have a regular employer who issues pay stubs, this should be quite simple. Gather up your last six months of pay stubs for your bankruptcy attorney (you may need to speak to your payroll department if you do not keep them). Your bankruptcy attorney should be able to quickly determine what you have earned.

However, calculating your means test income is a bit trickier if you are self-employed or engaged in non-traditional work. The most common recent example is ride sharing, such as Uber or Lyft. If you work as a ride sharing driver, you will probably not receive a traditional pay stub. Both of these companies provide summaries online, which you will need to forward to your bankruptcy attorney. However, these summaries do not include proof of taxes paid, which is done directly by the driver. They also do not disclose your expenses, such as gas and auto maintenance. You will need to separately provide your bankruptcy attorney with proof of taxes paid, or other expenses.

Other types of self-employment raise similar, sometimes even trickier, issues. If you are a self-employed contractor for instance, you may need to provide your attorney with 12 months of income and expense statements. Not only must you show your gross deposits, you must also show corresponding expenses for things such as materials. If you are involved in sales, your income may be irregular and dependent on commissions. You will need to provide this information. You will want to speak to an experienced bankruptcy attorney if you are self-employed, as this can be a complicated area of the law which you will need guided through.

If you are not employed, there are other types of "income" you must be prepared to show the bankruptcy court. Unemployment compensation is income for bankruptcy purposes, and therefore must be disclosed. The state unemployment website allows you to access a summary of all benefits paid. If you receive Social Security or pension income, you will want to find your yearly benefits letter as proof of income. If you receive a regular contribution towards your expenses from a spouse or loved one, you must be prepared to calculate exactly how much for your attorney. Regardless of what type of income you receive, it must be disclosed to the bankruptcy court.

One final point, you must also disclose the income of your spouse, if you are not separated. This is even true if they are not filing. So, everything from above will apply the same for your spouse. The means test is for household income, which will include spousal income (once again, assuming you are not legally separated).

Your bankruptcy attorney will discuss these issue in greater detail, but if you are considering whether or not to file, it would not hurt to gather up this information. It will be the first step towards determining your eligibility to file. Contact us if you would like to schedule a free, one-hour consultation to review your income and debts.

Do I Qualify For Chapter 7 Bankruptcy: Part 1

Chapter 7 bankruptcy is a great option for many individuals facing large debt burdens, especially for credit cards, medical bills, and repossessed cars. Chapter 7 bankruptcy can wipe out these debts, and any related lawsuits. It helps individuals get back on their feet and on with their lives. Chapter 7 bankruptcy is a one-time filing, and unlike Chapter 13 bankruptcy, does not require any money to be repaid to unsecured creditors.

Not all debtors, however, qualify for a Chapter 7 bankruptcy. This and the next two posts will discuss the issues which determine whether an individual qualifies for a Chapter 7 bankruptcy. I go through these questions and issues any time I meet with a new client who is considering bankruptcy. Most of these issues deal with income, property, and debts, and sometimes with timing. The initial issue I always discuss first is household income. This is the most frequent determinate of whether or not an individual qualifies for Chapter 7 bankruptcy.

Bankruptcy petition filers must, in most cases, complete a financial determination called the "means test". This is a six-month look-back of all household income. It includes non-filing spouses, and it includes a very broad definition of "income", with nearly all types of income besides Social Security income counting. This includes bonuses, unemployment compensation, one-time windfalls, retirement accounts, and even child support. It includes income that is both taxable and exempt from taxation.

This broad definition often frustrates potential filers. "Why does my spouse's income count, even if they will not be filing?" "Why is a one-time bonus considered income?" I can sympathize with these questions, but the reality is they count because Congress says they do. We have to deal with the law as it is, not as we wish it would be. However, there are a few things that can help push towards Chapter 7.

First, the amount you are allowed to earn increases with household size, which includes spouses and non-earning children. A household of one can gross (earnings before taxes) about $25,500 in the six months before filing. The allowable amount increases with each household member. For instance, a household of four can earn roughly $45,000 for the same look-back period. The more members of your family, the more you can earn and still file Chapter 7 bankruptcy. The means test is described in greater detail elsewhere on this blog, but for now it suffices to say that recent income is the initial factor in determining Chapter 7 eligibility.

What if you are above this threshold? There are a couple options. First, you can wait to file. If your income will be decreasing in the next several months, or you had a large one-time windfall in the last six months, it may be worth waiting in order to fall below the allowable income limit. Planning of this type is an important part of my job. Second, it is possible to file a Chapter 13 bankruptcy if your income is too great for a Chapter 7 bankruptcy. Chapter 13 bankruptcy is discussed in detail elsewhere on this website and in this blog. While Chapter 13 does require at least some repayment to creditors, it eliminates interest, freezes the amount owed, and stops any lawsuits. So, it is often a useful tool.

So, the first thing I will need to determine if you qualify for Chapter 7 bankruptcy is six months of pay stubs (for you and your spouse) or bank statements if you do not receive pay stubs. If you are near the threshold, having this information can make the initial consultation a lot more useful.

Contact us if you are considering Chapter 7 bankruptcy, but are not sure if your income disqualifies you. I will be happy to review your earnings and advise you on the best plan going forward.

In my next post (Part 2), I will discuss the importance of your mortgage in filing Chapter 7 bankruptcy.

Non-Filing Spouses and Bankruptcy

Married couples are not required to file a joint bankruptcy when one spouse needs to file. Having one spouse file, and one spouse NOT file is completely permissible. However, the non-filing spouse will usually need to provide some information for the petition, even if they are not included. This is because the bankruptcy court considers household income when married spouses, living together, file a bankruptcy. The are also a few other things to consider when filing a bankruptcy for married couples, as well.

When a bankruptcy is filed, a means test must normally be completed to show household income for the six months previous to filing bankruptcy. This includes the income of non-filing spouses. Some of my clients will ask, "but, my husband/wife is not filing, why does their income need to be considered?" It does because, basically... bankruptcy law says it must be included. Congress determined in drafting the bankruptcy code that the ability of one spouse to repay the other's debt should be considered, so that is the law we need to work with, for better or worse. For that reason, I will need to 6 months of pay stubs for BOTH spouses. I will also normally need two years of tax returns for spouses, as well.

Once again, you need to be married for this to be the case. The income of fiancees or boyfriends/girlfriends does not need to be considered. Also, you must be living in the same household as your married spouse. If you are separated and keeping separate households, only the income of the filing spouse must be considered.

Non-filing spouses may also be important in determining the status of your property at the time of filing, and whether it can be protected from your creditors in bankruptcy. The bankruptcy exemptions normally allow filers to protect all of their property, but sometimes these exemptions can be exhausted. For instance, you are normally allowed to protect about $26,000 in equity in your home. This can be a problem in filing Chapter 7 bankruptcy if your equity exceeds $26,000. However, if you are married, and your non-filing spouse has a 1/2 interest in your home, your equity is essentially cut in half, because 1/2 of it belongs to the non-filing spouse. This makes it sometimes important to verify if both spouses are on a deed, and can sometimes be important with other exemptions. Therefore, sometimes we need to consider the property of the non-filing spouse.

Joint debts are also important to consider when one spouse does not want to file bankruptcy. Joint credit card debt, and car payments, are both considered "joint and several liability". This means a creditor can go after one spouse, both spouses, or neither spouse, when collecting a debt. And they can go after just one spouse for all of the money owed on a debt. This becomes important if there are numerous joint debts and only one spouse files a bankruptcy. While the filing spouse will have his or her debts discharged through the bankruptcy, the non-filing spouse will become entirely liable under joint and several liability. So, it is very important to determine who is on each debt, and for how much, because in some cases it will only make sense for both spouses to file jointly.

Contact us if you are trying to decide if filing bankruptcy jointly makes more sense, or if you are able to have only one spouse file. I'll happy to sit down and discuss your situation and see what makes more sense for your household.

Means Test Update, May 2017

The means test is a six-month income look back that is calculated when filing a bankruptcy. It determines if an individual must repay unsecured creditors in a Chapter 13 bankruptcy. This threshold is determined initially by looking at gross household income and household size. The gross income thresholds are periodically updated by the bankruptcy court for each region, to take into account inflation and other factors. They were most recently updated on May 1st, 2017.

The gross income limits for the six months before filing, above which you no longer qualify for Chapter 7 bankruptcy in most cases, are now the following in Allegheny County (as of May 1st, 2017):

  • Household of 1: $25,569.00
  • Household of 2: $30,635.50
  • Household of 3: $37,509.00
  • Household of 4: $45,410.50
  • Household of 5: $49,610.50
  • Household of 6: $53,810.50
  • Household of 7: $58,010.50
  • Household of 8: $62,210.50

Each additional household member beyond 8 will add $4,200.00 to the threshold.

A few things to point out about this chart. Once again, this is for all household income for the six months previous to filing, including non-filing spouses. Even if a spouse has no debts, or no desire to file, their income will be a part of the calculation if they are married and living in the same household. Pretty much all sources of income outside of Social Security payments is considered income. This includes unemployment, bonuses, retirement distributions, lottery winnings, and rental income. If in doubt, assume it will be income for means test purposes.

Second, dependents are generally determined by their federal income tax status in the family. In short, if you claim a child on your federal income taxes, you can claim them as household members for purposes of the means test. Adult dependents can sometimes be claimed, but you will need to consult an experienced bankruptcy attorney to determine this with certainty.

Finally, remember these numbers are for gross (before tax) income, not net (after deductions) income. If you are above the threshold, but just barely, your attorney can review your deductions to determine your "Disposable Monthly Income", or DMI. This calculation will determine how much, if anything, you must pay your unsecured creditors.

The means test is a moving six month window. Contact us to take a look at your recent income and determine if the means test will be an issue in your case. It may be necessary to wait, or hurry up and file, depending on your recent (and future) income. I will be happy to look at your situation at a free consultation.