Chapter 7 bankruptcy is an extremely powerful tool that can help you get out from underneath overwhelming debt and get a fresh start. However, most people don’t realize that you have to be income-qualified in order to be eligible to file for Chapter 7.
In order to qualify for Chapter 7 bankruptcy, you have to first pass what is referred to as the “means test.” The purpose of the test is to ensure that you truly cannot pay your creditors. If your average monthly income is below the median income, then you qualify for Chapter 7 bankruptcy.
If your average monthly income is higher than the median income, the good news is that you aren’t necessarily disqualified from filing Chapter 7. Unfortunately, you will have to provide greater detail regarding your income and expenses in order to pass the means test.
We want to emphasize that the means test varies by state. As a result, it’s critical that you discuss your case with a Minnesota bankruptcy lawyer if you are considering filing for Chapter 7 bankruptcy.
How to Determine Your Current Monthly Income
The means test requires that you calculate your average monthly income for the six months prior to the date you file for bankruptcy. You must include all sources of income, whether they are taxed or not, with very few exceptions. Here are some examples of income that should be included when calculating your average monthly income:
- Wages, salary, bonuses, overtime pay, commissions, and tips
- Interest and dividends
- Income from rental properties
- Child or spousal support
- Your spouse’s income – even if your spouse is not filing
- Unemployment compensation, worker’s compensation, and disability payments
- Income from a business
When calculating your monthly income, add up the total of all of your sources of income for the last six months, and then divide by six. For purposes of this calculation, you should use your pre-tax income.
At this point, one of the most important elements of the means test is household size, so you’ll want to make sure you are comparing your current income against the median income of a family of the same size. If your average monthly income is less than the median income for the same-size family in the state of Minnesota, then you have passed the means test and can file for Chapter 7 bankruptcy. If your monthly income is too high, then you should review your expenses with the help of a Minnesota bankruptcy law firm.
Expenses That Can Help You Pass the Means Test
If your income is higher than the median income, you can then use certain expenses as deductions in order to reduce your income and hopefully pass the means test. Here are some of the most important expenses that can help you qualify for Chapter 7 bankruptcy:
- Taxes. You can deduct any amount you pay in taxes from your average monthly income. This is particularly helpful if you have a high income but pay a significant amount of taxes.
- Secured debt payments. Secured debts are those that are secured by collateral. Mortgage and car loan payments are common examples of secured debt payments that can be deducted from your income. However, claiming these expenses is somewhat complicated - your payments have to be higher than the amounts set by the IRS.
- Child support and alimony. If you are making any payments pursuant to a court order, you can deduct these expenses from your monthly income. Child and spousal support are the two most common examples.
- Childcare expenses. Daycare, pre-school, or babysitting expenses can also be deducted from your monthly income.
- Continuing charitable donations. If you have a demonstrable history of contributing to charities and intend to do so into the future, these amounts can be deducted from your monthly income.
- Continuing expenses for the care of an ill, elderly, or disabled member of your household.
- Out-of-pocket health care expenses. Any expenses not covered by your health insurance. However, these expenses need to exceed the standard amount set by the IRS.
- Involuntary employment expenses. Things like union dues, retirement contributions, and other amounts that are deducted from your paycheck can be deducted from your monthly income.
- Educational expenses required for your job or necessary for the care of a disabled child.
- Expenses necessary for your health and welfare. This may seem fairly broad, but you have to be careful in deducting these expenses from your income.
You have probably noticed that this analysis sounds very similar to claiming deductions on your tax returns. For bankruptcy purposes, you’re instead using these expenses to determine whether your average monthly income is less than the median income for a family the same size as yours. And just like filing your taxes, sometimes you need to hire a professional - a Minnesota bankruptcy attorney has the knowledge and experience to help you accurately determine whether or not you qualify for Chapter 7 Bankruptcy.