Some Random Thought on the Bankruptcy Means Test

The bankruptcy means test income thresholds have changed as of April 1, 2022. I discussed this change in my last blog post. Now is a good time to post a few things to remember while dealing with the bankruptcy means test. Just some random thoughts and information…

-Household size is generally determined by your federal income tax dependent claims and your marriage status. If you claim a kid on your taxes, you can likely claim them as a dependent in bankruptcy.

-The means test has a very broad definition of income. It includes things such as bonuses, commissions, gambling winnings, unemployment, second jobs, and the even one time windfalls such as lottery winnings. It does not include Social Security and VA benefits.

-While the means test thresholds are expressed in yearly amounts, it is actually only the six months previous to the month of filing that are considered.

-You may be exempt from the means test if either your debts were accrued while you were on active duty in the military, or your debts are primarily business in nature.

-The means test includes the income of both spouses, even if only one spouse is intending to file. This can be a little confusing for bankruptcy filers, but the fact you must disclose your non-filing spouse’s income will have no impact on them. They are not a part of the bankruptcy filing.

-The means test income threshold‘s are updated every year on April 1st.

-Means test deductions are generally based off of IRS standards, but actual taxes paid and insurance costs can be used.

These are just a few things to keep in mind if you are considering filing bankruptcy and you don’t know whether or not you will pass the means test. If you have any questions about Bankruptcy or the means test, please reach out to us at 412-414-9366. I would be happy to set up a free consultation and discuss your situation!

Updated Means Test Income

The US Census Bureau Family Medium Income chart will be updated once again on April 1st, 2022. This is important because it helps determine whether or not you can file for Chapter 7 Bankruptcy. Incomes above the threshold (annualized on the chart) are not eligible to for a Chapter 7 bankruptcy, but instead must file a five-year Chapter 13 Bankruptcy plan.

The actual look back period is six months, though the chart as provided by the US Census Bureau is in annualized amounts. Therefore, these numbers can be divided by two to give you an idea of whether or not your gross income for the six months before filing is too much to file Chapter 7 Bankruptcy. The new amounts are as followed:

• Household of one: $60,640.00

• Household of two: $74,805.00

• Household of three: $92,441.00

• Household of four: $110,077.00

• Add $9,900.00 for each individual in excess of 4
  

  Call us at 412-414-9366 to set up a free consultation if you want to know whether or not you qualify for the Chapter 7 Bankruptcy. Many issues go into determining whether or not you qualify, but understanding the means test is a good start.

"Income" in Bankruptcy

The definition of income seems simple enough. How much money do you make? But, like most things in bankruptcy law, it is a bit more confusing than that.

First of all, there are two ways of looking at income, gross income and net income. Gross income is the money you earn before taxes, and net income is your earnings after they are removed. Both are important in bankruptcy. Your gross income will be considered in the “means test” (which is discussed in greater detail elsewhere on this blog and website) while your net income will be used in Schedules I & J in the bankruptcy petition.

While gross and net income will generally be proportional in most cases, sometimes they can differ between filers. For instance, net income can be lower if your tax withholdings are particularly high, or if you have large deductions for insurance or retirement accounts. Either way, your bankruptcy attorney will need to discuss both types of income with you in order to determine your eligibility to file bankruptcy.

The definition of income can also be confusing in bankruptcy because the court will consider certain payments to be “income” that go beyond your paycheck. For instance, any type of government benefits will be considered income. This includes Social Security, unemployment compensation, VA benefits, and even food stamps. Adding further confusion, Social Security is considered income for purposes of Schedules I & J of the bankruptcy petition, but NOT for the means test!

The court will also consider other indirect payments as “income”. This includes household contributions towards expenses, side jobs, and even one-time windfalls like lottery winnings! A contribution towards expenses from a roommate is not the traditional ideal of “income”, but in bankruptcy, it is.

This can all be very overwhelming for an individual trying to determine on their own if they qualify. But, I would be happy to discuss your situation and help you determine your bankruptcy “income”. The primary purpose of this blog is let you know you should disclose ANY type of income you may have to your bankruptcy attorney, even if your don’t think of it as “income” per se. As an experienced bankruptcy attorney, I will be happy to walk you through this confusing subject in a free phone consultation. Call me at 412-414-9366.

Updated Means Test Median Family Income Tables

Effective April 1, 2020, the table used to determine the “means test” in Chapter 7 and Chapter 13 bankruptcy has been updated for the Western District of Pennsylvania.

The amount you can earn without repaying unsecured creditors is determined by 1) your household size, and 2) your household income. This information is used to calculate the “means test”, which is an objective standard of whether you are required to repay.

Your household size will, with only a few exceptions, include you, your spouse, and any children you claim on your taxes. Your spouse will be included for calculation purposes even if they have no intention of filing bankruptcy. They will not be included if you are legally separated and living in separate households. Children will be included as long as they are still claimed on your federal income taxes. Non-claimed children will not be included for purposed of household size.

Household income is broadly calculated to include almost anything besides benefits derived from the Social Security Act. This includes unemployment, bonuses, self-employment, or even alimony and child support. The look-back period is the six months before filing bankruptcy.

It is important to point out that it will NOT include income received as part of the CARES stimulus act.

One last important thing to remember is that income is determined by GROSS, before tax, income. Here is the updated chart for gross income in the six months before filing, as of April 1, 2020 (amount listed below is combined income for all household members, averaged per month):

• Household of one: $4,550.00 per month

• Household of two: $5,628.00 per month (including all earners)

• Household of three: $6,989.00 per month (including all earners)

• Household of four: $8,610.00 per month (including all earners)

• Household of five: $9,360.00 per month (including all earners)

• Household of six: $10,110.00 per month (including all earners)

• Household of seven: $10,860.00 per month (including all earners)

Contact us for a more detailed analysis of your income. If you are able to forward me proof of income, I can determined whether or not you will be required to pay unsecured creditors in bankruptcy.

If your income is disrupted by the COVID-19 epidemic, now may be the best time to file.

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.