One of the primary element of any bankruptcy filing is something known as a means test. It plays a pivotal role in determining a number of different things that all play a role in filing bankruptcy, including the chapter that may be filed, and in some cases, how long the bankruptcy itself will last. The primary factor evaluated by the means test is income – specifically, income earned in the six months prior to filing.
This includes income earned from all sources – employment & unemployment, social security and pensions, child support, alimony and investments. However, not all income is viewed in the same way when conducting a means test. Although all income must be reported, only certain forms of income are considered relevant when determining things such as the chapter of bankruptcy that you may file, or the length of time that you will be engaged in a bankruptcy.
Generally speaking, income from sources such as Social Security, VA disability and VA retirement are all outside of the calculation that determines filing eligibility and commitment length. Conversely, income from sources such as employment, self-employment, business and investment earnings, child support and alimony are all factored in. This naturally leads to the question; what is determined by the means test evaluating these income sources? Moreover, what time frame is considered when looking at them?
With regard to timeframe, the lookback period is six months. Specifically, the last six completed months that immediately precede a bankruptcy filing. So, for example, if a bankruptcy is filed in the middle of January, the means test would looks at income earned between July and December. How is this done? Generally, the income from all considered categories is aggregated into a single grant total, and then divided by six. This gives your average monthly income received in the six months prior to filing. Crucial to note here is that this would include not only your own income, but a spouse’s income as well (regardless of whether or not the spouse is also filing).
Once the average income is determined, the next thing that is considered is whether it places you either over or under median. Median income is determined by looking at the typical income earned by a household of equivalent size for the state that you live in. Thus, if are married, have two children and live in Blaine, median income would be based on what a typical family of four in the state of Minnesota earns or receives in income in any given month. Median income is tracked and reported by the IRS, who publish a new table of median income four times per year.
Determining whether you are either over or under median primarily accomplishes two things: first, it establishes a rebuttable presumption of whether or not you are eligible to file for a Chapter 7 bankruptcy. Second, for those who are considering a Chapter 13 filing, it also helps to determine the minimum amount of time that a Chapter 13 plan must run. Crucial to note here is that although the means test is generally indicative of which chapter you may file, it establishes a presumption only, and this presumption may be overcome in certain specific scenarios and circumstances.
The means test encompasses a great many factors, and it can effect a bankruptcy filing in a number of different ways. Luckily, our firm are highly experienced in evaluating these factors and determining how they can impact a bankruptcy filing. If you are curious about how the means test could be relevant in your circumstances, please give us a call!
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We would be happy to speak with you, and we would love to have the opportunity to discuss how a possible bankruptcy filing might benefit you and your individual circumstances. So, when the time is right, or when you are ready, please don’t hesitate to reach out to Minnesota’s most kind and helpful bankruptcy law firm by going now to www.lifebacklaw.com.
