Bankruptcy and Median Income – Do you qualify?
The “Means Test” is a major hurdle for anyone who’s considering filing a Chapter 7 bankruptcy. The Test consists of a financial analysis of income and allowable (necessary) expenses to determine how much “discretionary” income remains. If you pass, you can file. If not, then you’re stuck with one of the other bankruptcy chapters which usually mean much more complication, continual involvement from the bankruptcy trustee and court.
However, Congress did provide a way to automatically pass the test. It involves your income as compared to other wage earners in the state. So how do you get the auto-pass? It boils down to being below the “median.”
The Median Income figure used for the review is determined by a series of government agencies (mostly the Dept. of Justice, based on the Census Bureau’s review, IRS data and other factors). It’s supposed to be the middle point of all incomes in the state from lowest to highest (the “median”). The median changes based on the number of people in your household. So if it’s just you then the median may be $40,000 per year. But if it’s you, your spouse and 2 children then the median could be $70,000. The median is updated at least once a year (sometimes more frequently) so it’s a moving target and can go up or down.
Your income will be determined as the last six full months that just passed. For example, if it’s September 15th, the six months that will count to determine your income are March through August. Whatever your average household income was during that period will be your income for the Means Test. The income will be based on gross wages so it’s not the amount you put in the bank; it’s the total amount you receive on your paycheck.
So if bankruptcy’s something you’re considering, take a look at your income as it compares to the median income for your state. If yours is below the median, then you just passed the Means Test. You can find the current median incomes at http://www.justice.gov/ust/eo/bapcpa/meanstesting.htm.
By: Evan A. Nielsen, Esq. (Licensed in California)