Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, the goal is to discharge most unsecured debts quickly. The calculation of income determines whether you qualify for Chapter 7 and how the bankruptcy trustee will handle your case. We calculate your income with what is called the “means test.” The means test involves taking your average gross monthly income over the six months before filing (not just your salary, but all sources of income, such as bonuses, rental income, and unemployment benefits) and then annualizing that average to get a rough annual income. If your income is below the median, you typically qualify for Chapter 7. If it is above, further calculations determine if you have the ability to pay a portion of your debts under Chapter 13. Certain incomes do not need to be included such as social security, social security disability, or VA disability.
Chapter 13 Bankruptcy
On the other hand, a Chapter 13 bankruptcy involves creating a repayment plan to pay off some or all of your debts over three to five years. Income calculations are crucial for establishing this repayment plan. To determine your income we still use the means test like a chapter 7. However, the main purpose of calculating income in a chapter 13 is to determine how much disposable income you have. So once we find the average, we subtract allowable expenses and living costs from your total income to calculate your disposable income. These deductions can include mortgage payments, car loans, insurance, and certain necessary living expenses. Whatever is left over is generally what your monthly payment will be. The bankruptcy court will review and approve your repayment plan, ensuring it’s feasible based on your financial situation.
If you’ve experienced a change in income and are worried about your debts, look no further than Minnesota’s nicest bankruptcy attorneys. Visit us at lifebacklaw.com and schedule a free consultation today.