Qualification for Chapter 7 Bankruptcy is based solely on income. Specifically, income from the last six complete months. So if we are sitting in November, we analyze gross (not net) income from May 1st to September 30th. (It is a rolling six-month basis, so in December we will count June to November.) We go by check dates (not pay periods) and include all income from almost every source (except Social Security) received during that time frame. Then we take that six month total divide it by 6 to get an average monthly income amount. Then we multiply the average by twelve to get an annual view. Lastly, we compare the annual amount to the median income for the prospective client’s state and household size.
This calculation (that I often refer to as “magical bankruptcy math!”) is technically called a Means Test. It is an assessment used to determine if you qualify to file a Chapter 7 Bankruptcy. In legal terms, it is a calculation used to determine if a presumption of abuse applies.
Before 2005, it was easy to file for bankruptcy; virtually anyone could do so. In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) and added the Means Test requirement to prevent abuse of the Bankruptcy process. Simply put if you “pass” the means test, you are a qualified candidate and can file a Chapter 7 Bankruptcy Petition. If you “fail” the means Test, you may not file a Chapter 7 Bankruptcy but you may enjoy other alternatives such as a Chapter 13 Bankruptcy.
The Means Test primarily encompasses a two-step analysis:
STEP ONE: The debtor’s gross income is calculated on an average over a six-month period prior to filing for Bankruptcy. Gross income for means testing purposes includes wages, salary, tips, bonuses, overtime and commissions as well as rental income, retirement and pension payments, etc. It does not include social security benefits. The figure derived from taking the average is then considered the Debtor’s Current Monthly Income which is then compared to the median income for your state and household size. If your current monthly income is less than the median income for your state and household size, than you “pass” the means test and are allowed to file a Chapter 7 Bankruptcy Petition. If, however, your current monthly income is greater than the median income for your state and household size, you may proceed to Step Two.
STEP TWO: If your current monthly income is greater than the median income for your state and household size, there is, in technical terms, a “presumption of abuse.” In order to rebut the presumption, or in other words, to pass the means test by using the second step analysis, the means test’s second section allows you to subtract from your current monthly income certain allowable and deductible expenses (based on National and Local IRS Standards, and not dollar-for-dollar deductions.) These allowed deductions include, but are not limited to, expenses for living (mortgages and property taxes), transportation (car loans and car taxes), health insurance and charitable donations. After the calculations are performed, and the allowable deductions are taken, and if you then have no disposable monthly income available, you will than have passed the Means Test (with no presumption of abuse) and may file a Chapter 7 Bankruptcy. If, on the other hand, you do have remaining disposable income, you may consider a Chapter 13 Bankruptcy, or bankruptcy alternatives.
The median income amounts for each household size vary from state to state and change (going up or down) historically and traditionally every April 1st and November 1st. Just in the last weeks, the United States Trustee announced that median income amounts are mostly going down in Connecticut as of November 1, 2024. For example, a single individual who has an income of $79,982.00 or less can file in November of 2024 (but in October 2024, they were allowed to make up to $81,282.00). The median income amounts are going down for households of two and three as well but they are going up for households of four.
Due to these changes, less and less people will be qualified for Bankruptcy relief.
If you are contemplating filing Bankruptcy, please contact me immediately and I will run your Means Test.
