What is income for bankruptcy purposes?

Posted by Wesley Scott on April 20, 2020 at 12:22 PM
Wesley Scott

The preparation of bankruptcy petitions, schedules and statements, whether for a chapter 7 or a chapter 13 case involves an analysis of how much income is earned by the bankruptcy debtor or debtors.  It’s a factor in the determination of monthly income (the means test) and it’s a factor in scheduling an accurate budget in the bankruptcy schedules.

For many clients, the calculation of income is not all that complicated.  A person who earns a salary has very definable income – for both the means test and budgeting purposes.  But if we’re not dealing with a salaried employee, then the question of income can get to be a little trickier.  Here are some things to keep in mind when we talk about income in bankruptcy cases.

Means test income.  Bankruptcy debtors include all sources of income (with a couple of exceptions) in filling in income information for the bankruptcy means test.  We use gross, not take-home income.  Income includes wages, salaries, commissions and tips.  It includes alimony and child support payments received by the debtor.  It includes the contribution to household income by third parties that go to pay household expenses.  It includes pension income.  It includes rent paid to the debtor.  In a chapter 7 case, the “net” rent is calculated: the amount of rent received minus the costs of the rental property.  In chapter 13, the costs are not calculated – the amount of rent is the “gross” not “net” amount.  Income includes self-employment income and the chapter 7/chapter 13 distinction that is present in rental income is also present in self-employment income – we use a “net” number in chapter 7 and a “gross” number in chapter 13.

Here’s what is not counted as income in determining income in the means test: Social Security and Veterans Benefits and Covid-19 Stimulus payments.  Some of these benefits can be pretty generous, but they aren’t income for the purpose of making the means test determination.           

If you’re thinking about filing bankruptcy, it’s important to understand the means test calculation so that you can understand the criteria used in determining if a debtor has the option of filing a chapter 7 or chapter 13 case, or if the debtor must file a chapter 13.  The kind and helpful lawyers at Kain & Scott deal with these issues everyday – and we’re here to help you when you need us. See us at www.kainscott.com. You will be glad you did!


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