When an individual files for bankruptcy, they are required to file schedules disclosing their household income and household expenses. Depending on your circumstances and which bankruptcy chapter you file under, your household income can affect your eligibility to obtain a discharge of your debts and how much you may be required to pay your creditors. For individuals, there are two primary types of bankruptcy options: Chapter 7 and Chapter 13 to consider.
How Household Income Impacts Chapter 7 Bankruptcy:
When a person files for Chapter 7 bankruptcy, they are asking the Court to grant a discharge of their debts in exchange for surrendering their non-exempt assets to their creditors. In a case where an individual’s debts are primarily non-consumer, (i.e. business-related, tax obligations, tort claims), then household income is largely irrelevant. However, in cases where a person’s debts are primarily consumer debts, such as a mortgage, student loans, car loans, and credit cards, then household income is much more relevant to the case.
In cases where debts are primarily consumer, you are required to file a Statement of Current Monthly Income disclosing your average gross monthly household income from all sources (other than social security income and social security benefits). It is important to note that even where only one spouse is filing for bankruptcy, the other, non-filing spouse’s income must still be included in this statement. Once you’ve determined the current monthly income, we must then compare that amount with the median household income for similar-sized households where you reside. In Massachusetts, the median annual household income ranges from $71,708 for a household of one to $151,040 for a household of five. If your current monthly income is less than the median household income, then you will most likely qualify for a Chapter 7 discharge, provided your schedules of income and expenses show that your household income and expenses are roughly equal, or no more than $50 excess after accounting for reasonable living expenses. For most people preparing to file for bankruptcy whose income is below median household income, this is not a problem as they would not have needed incurred so much debt if their income were greater than their expenses. However, in cases where a below-median income person shows that they have significant excess monthly income, a case may be dismissed, or voluntarily converted to Chapter 13 where a person shows an ability to repay a meaningful portion of their debts, despite having below median income.
When a person’s household income is greater than the median household income, the requirements for a Chapter 7 discharge become more rigorous. In those cases, you must complete a “Means Test” which looks more closely at your income and living expenses to determine whether you have sufficient disposable income to pay your creditors at least some portion of your debts. The Means Test begins by looking at your average monthly gross household income, then deducts your average tax withholdings, insurance, childcare expenses (but not a private school or college tuition and expenses) child support, alimony, payments on secured debts such as homes and cars. The Means Test also allows “standard deductions” for expenses such as food and housekeeping supplies, clothing, utilities, transportation. The standard deductions are determined by guidelines published by the IRS and are fixed regardless of what an individual’s actual expenses are. The Means Test does not allow deductions for things like entertainment, hobbies, children’s extracurricular activities, or rainy day savings. The underlying purpose of the Means Test was to require higher-income bankruptcy filers to reduce their expenses in order to pay their creditors more. Unfortunately, the Means Test does not really take into account the realities of life for many people and actual living expenses can easily exceed the standard deductions.
Once all of the allowable and standard deductions are accounted for, the means test calculates your “current monthly income” If your current monthly income, multiplied by 60 months, is greater than the lesser of 25% of your unsecured non-priority debts or $13,650, then your case is considered to be an “abuse” of the Bankruptcy Code and the United States Trustee will typically file a motion to dismiss the case, unless you voluntarily agree to convert it to Chapter or 11 or 13. There are very limited special circumstances that may be sufficient to rebut the presumption of abuse but can be very difficult to prove. If you are considering filing for Chapter 7, and your household income is over the median, it is important to do a thorough and accurate means test analysis prior to filing. The last thing you want is to have your case dismissed! By preparing the means test ahead of time you can avoid problems in your bankruptcy case. Often, with a person with an above-median income who might not otherwise be eligible, can pass the means test with proper advice and sufficient planning. In cases where a person absolutely cannot qualify for Chapter 7 bankruptcy, Chapter 13 may be an alternative, or they may want to consider non-bankruptcy workout options.
How Household Income Affect Chapter 13 Bankruptcy
When you file Chapter 13 Bankruptcy, you are proposing to make a payment plan with your creditors. Rather than surrender your assets to creditors, you remain in control of all your property, unless you decide to sell or surrender something. The amount of your monthly Chapter 13 Payment Plan is determined by several factors including 1) the value of your non-exempt assets that you are retaining; 2) the amount necessary to cure defaults on secured debts or priority claims, such as mortgage and car payment arrears, income taxes, child support or alimony; and 3; your disposable monthly income.
Much like the Chapter 7 means test determination of current monthly income, the calculation of disposable monthly income begins by looking at your average household income for the six months prior to filing for bankruptcy. From there, you are allowed the same standard and actual deductions as with the Chapter 7 means test. In addition, you may also deduct any amounts you are paying through the Chapter 13 Plan for secured debts, taxes, legal fees, and the Chapter 13 Trustee’s fees. After taking all available deductions, you arrive at the disposable monthly income, which is the amount you must pay to creditors over the 5-year term of your bankruptcy plan. The single biggest causing Chapter 13 bankruptcy cases to fail is inability to make the plan payments. This is why is so important to have consulted with an experienced bankruptcy attorney who can help you to minimize the plan payment, and increase the chance your case will be successful.
Learn More About How Household Income May Affect Your Bankruptcy Filing
If you are struggling to manage debts would like to learn more about whether bankruptcy may be right for you, call the Lipton Law Group at 508-202-0681 for a free consultation today. Attorney Marques Lipton has helped hundreds of Massachusetts residents discharge millions of dollars in debt and get a fresh financial start in life. We can help you to understand whether bankruptcy is the right solution for you.