Actually, there’s no income limit for filing bankruptcy. None, nada, no way.
Instead, there’s the infamous means test, an awkward and complex formula, written by Congress, to identify individuals who are entitled to file Chapter 7.
Not everyone has to take the means test. The means test doesn’s apply to individuals whose debt is primarily business or tax debt, nor does it apply to entities like corporations and LLC’s.
So, how does income figure into the means test?
Median income excuses many
If your household income is below the median income for families of your size, in your state, you pass the means test on the first try. You don’t have to go any further in the means test, and you can choose the bankruptcy chapter that suits your situation.
Your income is figured in a peculiar way. The means test takes your gross income for the past six months and multiples it by two to get your annual income for purposes of the means test. That figure is compared against the data for your state.
The state-by-state figures for median income by household size are found on the website of the United States Trustee. They are updated periodically.
Over-median individuals take test-part 2
The second part of the means test looks at your expenses in an attempt to calculate what you have available to pay unsecured creditors, according to Congress’s formula.
The allowable deductions from income to reach “disposable monthly income” are a mix of fixed allowances; payments on secured debts like car and mortgage; non-dischargeable taxes; and actual expenses for health care, child care, and support of family members. More on means test expenses.
Don’t overlook the fact that the expenses here are future expenses. You “project” what you have to pay to keep your family afloat. The place that projection is often most impactful is providing for postponed health care.
Note, too, that in determining whether you must pay something to credit cards and old medical bills, is that you budget first for paying off back support, recent delinquent taxes, and mortgage arrears. Those are debts that have a priority for payment in bankruptcy. Often, by the time those expenses are deducted from income, the balance is little or even negative.
Money on the bottom line
If at the end of the expense analysis, the resulting monthly “disposable income” multiplied by the 60 months of a hypothetical Chapter 13 totals more than $9075 over 60 months, there’s a second test that may still yield a passing score.
If the money available over 60 months wouldn’t pay 25% of your unsecured debt, you still pass the means test. This is effectively the only place where the total of your unsecured debt plays any part in the means test, or in eligibility for bankruptcy.
It’s more than the median income
So, take heart. There is no income limit for bankruptcy.
Being over-median income does not exclude you from bankruptcy relief. There are many ways in which the over-median debtor passes the means test and can choose the chapter of bankruptcy that suits their needs and goals.
