Are you considering bankruptcy and wondering what counts as income? Understanding what is counted as income in bankruptcy is crucial for navigating the process. In bankruptcy, income includes wages, rental income, alimony, and more, excluding Social Security benefits.
The "current monthly income" in bankruptcy is the average monthly income over the six months before filing. It includes regular contributions from non-debtors and a spouse's income in joint petitions but excludes social security income and some crime victim payments.
With extensive experience in bankruptcy law, our team provides expert guidance. Let's delve deeper into the specifics of income in bankruptcy and how it affects your filing.
What Is the Bankruptcy Means Test?
The means test is used to determine if you qualify for Chapter 7 bankruptcy based on your income and expenses. Here’s what you need to know:
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It calculates your disposable income by analyzing your income and allowed expenses.
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The means test can be complex, but even if you don’t meet the criteria, filing for bankruptcy may still be possible.
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A bankruptcy attorney can provide clarity and determine if Chapter 7 is an option for you.
The means test ensures your Chapter 7 filing is not presumptively abusive, a requirement under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).
How Do You Calculate Your Current Monthly Income?
To determine your current monthly income for Chapter 7:
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Add up your gross income for the past six months.
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Divide the total by six to get your average monthly income.
Your income must include:
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Wages, salaries, and tips
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Rental income
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Child support and alimony
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Pension or other regular income
Social Security income is excluded from the means test calculation but must still appear on Schedule I, which lists your current income.
What Types of Income Are Considered in Bankruptcy?
When calculating income in bankruptcy:
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Taxable income: Wages, tips, and self-employment income are included.
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Unemployment benefits and workers’ compensation: These are considered as part of your income.
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Non-debtor contributions: Regular support from family members or roommates must be included.
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Disposable income: The means test deducts certain allowable expenses to determine your disposable income.
Higher disposable income can make qualifying for Chapter 7 more challenging, but a bankruptcy attorney can help you understand the exact calculations.
How Are Expenses Factored Into the Means Test?
If your income exceeds the state median, the means test will analyze your expenses to determine eligibility. Here’s how:
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Standard expenses are partially based on national and local standards.
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Actual expenses are considered with proper documentation and limitations.
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Non-discretionary expenses such as rent, utilities, and childcare are deducted.
A bankruptcy attorney can clarify which expenses apply and ensure accurate calculations. The process involves more than simply listing your monthly bills.
What Happens If You Fail the Bankruptcy Means Test?
If you don’t pass the means test, you still have options:
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File for Chapter 13 bankruptcy: This allows you to create a repayment plan lasting 3-5 years.
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Document accuracy: Errors in income or expense calculations can be corrected.
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Alternative solutions: Explore debt settlement or credit counseling services.
Failing the means test doesn’t end your journey toward debt relief—a bankruptcy attorney can help you decide the best next steps.
What Is Chapter 13 Bankruptcy and How Is It Different?
Chapter 13 bankruptcy is an alternative to Chapter 7 and may be ideal if:
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You have a stable income and can repay a portion of your debts.
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You want to protect your property, such as your home or vehicle, from foreclosure.
Key aspects of Chapter 13:
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A 3-5 year repayment plan managed by a trustee
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Regular payments made to the trustee, who distributes funds to creditors
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The ability to keep your property while addressing your debts
Chapter 13 offers a structured approach to managing your financial obligations.
How Does Income Affect Eligibility for Chapter 7 Bankruptcy?
Your income plays a major role in determining whether you qualify for Chapter 7 bankruptcy. If your income exceeds your state’s median income, you must pass the means test:
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Below Median Income: If your income is below the state median, you automatically qualify for Chapter 7.
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Above Median Income: The means test calculates your disposable income by subtracting allowable expenses from your gross income.
If your disposable income is too high, you may need to explore Chapter 13 bankruptcy instead.
What Income Is Excluded From Bankruptcy Calculations?
While many forms of income must be included, certain types are excluded from bankruptcy calculations:
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Social Security benefits
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Payments for crime victims
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Certain disability benefits
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War crime reparations
It’s essential to accurately distinguish between excluded and included income to ensure compliance and avoid errors in your bankruptcy filing.
What Should You Do If You’re Considering Bankruptcy?
If you’re thinking about filing for bankruptcy, here’s what to do next:
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Consult a bankruptcy attorney to review your financial situation and options.
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Complete the required credit counseling course before filing.
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Gather financial records, including income, expenses, and debts.
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Understand the laws governing your bankruptcy filing to avoid errors.
An experienced attorney can guide you through the process, ensuring compliance with federal bankruptcy laws and maximizing your chances for success.
Ready to Take the First Step Toward Financial Relief?
Understanding what counts as income in bankruptcy is critical to successfully navigating the process. At LifeBack Law Firm, we provide the expert guidance you need to move forward with confidence. Contact us today to discuss your options and take control of your financial future.
