Are there income limits in bankruptcy?
If you’re dealing with debt, then you might be interest in learning more about whether you can file for bankruptcy. One of the key things that have to be analyzed in every bankruptcy case is the income available to the person filing for bankruptcy. This raises the question: are there income limits in bankruptcy?
In bankruptcy cases, there are two financial analyses that must be completed to by the debtor. The first is a snapshot of the debtor’s current budget. The second analyses is known as the Means Test, and is a test to determine whether a debtor may be abusing the bankruptcy system.
The Present Budget
The first financial analysis that must be completed in every bankruptcy case is to provide a snapshot of the debtor’s current budget. This is a look at the debtor’s actual income and expenses for the thirty days before the filing of the case.
This budget is similar to many other budget documents that you’ll find on the internet, if not more extensive. For bankruptcy, it’s broken down into two different forms, Schedule I for income, and Schedule J for expenses.
A debtor is expected to disclose and list all household income on Schedule I. The first source of income examined is income from wages. You are supposed to disclose your GROSS income, including the frequency you get paid (weekly, bi-weekly, etc). Then, you are supposed to itemize any deductions from your paycheck. Next, the form requires you to list income from any and all sources. These include rental income, dividend income, family support (whether court ordered or not), social security, government assistance, and any other source of income that your household regularly receives. Keep in mind that benefits like housing and food vouchers count as income, so be sure to include those on Schedule I.
Moving on to Schedule J, a debtor is going to list all the regular household expenses. These expenses are for things along the lines of necessaries. You do not list your payments towards debt on the Schedule I, such as credit card debt. (You will list, however, items like mortgage or auto payments). Be sure to go line by line and really think about your monthly expenditures. People often don’t really know how much they spend on certain items, or use numbers that don’t accurately reflect their expenditures.
Once you have disclosed all your monthly income and all your monthly expenses, you do a quick calculation subtracting your expenses from your income to come up with your monthly net income, which gets listed at the end of Schedule J.
Bankruptcy Means Test
The second financial analysis involved in bankruptcy cases is the Means Test. This analysis is intended to prevent people from filing for bankruptcy who should otherwise have the presumed ability to pay creditors.
The United States Department of Justice publishes certain standards that are used in the Means Test. These standards include median income, as well as certain costs of living, such as for food, housing, transportation, etc.
At its core, the Means Test operates as follows (limiting discussion here to a Chapter 7 case): you have to first calculate your Current Monthly Income by determining your average monthly income for the 6 months prior to filing. When calculating the Current Monthly Income, you have to use GROSS figures. If you make a living getting paid by the hour, you have to determine the average you made per month by looking at your last 6 months of paystubs. If you run your own business, you have to average out your net income from the 6 months prior to the case filing.
Once you calculate your current monthly income, you have to compare it across the median income of your state for a household of your size. For instance, let’s assume you’re a salaried person making $4,000.00 gross per month for the last year, and you live alone (so a household of one). When you annualize your income, you make $48,000.00 per year – your Current Monthly Income. You then have to compare this number, the CMI, to the median income for your state and household size. As of the time of this writing, the household median income for one person is $56,120. Since the annualized CMI is less than the median income, the presumption of abuse does not rise.
If, however, your CMI annualized is $60,000, since this is more than the median income, there is an initial presumption of abuse. At this point, you are allowed to deduct certain expenses (using the same USDOJ Means Test Standards) to reduce your CMI. Once you have calculated all of your allowable deductions, you subtract that number from your Current Monthly Income, then multiply that difference by 60.
If the result is less than $8,175 (as of this writing) there is no presumption of abuse. If the result is more than $13,650 (as of this writing), then the presumption of abuse still stands, and you can describe special circumstances to justify your case. If the result is more than $8,175 and less than $13,650, then the law allows you to run one more calculation to determine whether you can overcome the presumption of abuse.
Getting back to the original question, now: are there income limits in bankruptcy? While the surface answer is no, there are no income limits, because of the Means Test, a debtor’s income cannot be significantly higher than the standards allowed by law. So, in essence, there are income limits in bankruptcy without them actually being stated in the law.
Making sure your numbers are accurate makes up a huge part of each and every bankruptcy case. One of the biggest hurdles is the Means Test. Being able to apply the correct allowances, as well as being aware of allowances that case law has approved, are critical to try and get a bankruptcy case pushed successfully beyond the presumption of abuse.
If you are thinking about filing for bankruptcy, then contact the Law Office of Richard Kistnen, Tel.: (718) 738-2324 or rkistnen@LORK.nyc to discuss your case further. Be sure to sign up for the online bankruptcy workshop!