If you are considering filing bankruptcy bankruptcy you are required to complete the Means Test. The Means Test analyzes your household income relative to the your State’s Median income for your household. The median income can found at the US Trustees site here.
A Presumption of Abuse arises if you file for Chapter 7 bankruptcy, and your income is higher than your State’s median income for your household. This could result in a dismissal of your case. But, all is not lost, you can still qualify for a chapter 7 by completing the Means Test in its entirety.
In a chapter 13, the Means Test is useful determining your disposable income for a Chapter 13 payment plan.
What is household income? Household income is the gross income (before taxes) received by a member of the household. The following types of income comprise of household income.
Employment Income – Paycheck
Thankfully, for most people you can glean most if not all of the information you need by looking at the year-to-date income on a pay stub or a W-2 from the prior year.
Means test looks at the GROSS (not after tax, or net) annual income for the six months before filing. Easiest way to determine this is by adding the gross pay amounts on your pay stubs received in the six months prior to the month. After which you need to extrapolate what the yearly income is based on the average monthly income over those six months. Bonuses and bursts of overtime income will present a headache for some people and potential may prevent the filing of a chapter 7.
Business or 1099 Income
If you are self-employed or a 1099 employees you need to prepare a profit and loss statement for the six months prior to the filing of your case to determine your monthly income for means test purposes. This is irrespective of whether you report this income for tax purposes or not. Therefore, under the table cash payments etc have to be accounted for.
I have found this to be a difficult task for most self-employed people simply because they are not used to doing it. Most folks get around to doing this at tax time. But your case cannot move forward until you get this done.
You need to make sure you account for all gross receipts and your expenses to ensure your income is accurate because eligibility for a chapter 7 hinges on it and certainly any payment in a chapter 13 plan starts here.
The key factor is whether the gifts are regular. If you get money on a monthly or semi-monthly basis, it’s income. It’s the same with someone else paying for your expenses, such as a parent making your car payments or a boyfriend/girlfriend paying your bills. This type of income is called “contributions to household expenses” and must be reported, which usually involves a good bit of work looking over past bank statements and such.
Money from Other Sources
If you have an annuity, pensions or other retirement account that pays you on a regular basis then that is is also income that must be reported on the means test. Same goes for any child support or alimony you are receiving.
Regular contributions to household expenses are also considered income. For example, a nofiling party may help pay your car insurance etc. Then that is considered income to you.
Social Security or SSDI income is not included in the Means Test calculation.
The advise here is that you should tell your attorney everything you think may be considered income to avoid nasty surprises down the road. A knowledgeable bankruptcy lawyer will guide you through the process to ensure you report everything your are supposed to.
Joseph K. Githuku