When contemplating whether or not you need to file for Bankruptcy relief, one of the first items we will need to analyze is your income. The way this analysis generally works is by completing the Means Test. The Means Test was created in 2005 and added as a requirement to file for Bankruptcy relief. The purpose of this test is to prohibit people from filing for Chapter 7 relief if they make too much money, based on Congress’ standards.
Means Test – How Does It Work?
How the Means Tests works is that it takes the last 6 months of income and deducts from it certain deductions. At the end of that formula (6 months of income – Allowed deductions), you are left with what Congress feels your disposable income should be. In other words, this disposable income figure is how much you have left over to pay your general unsecured creditors (i.e., credit cards, medical bills, etc.).
For example, if your disposable income is $250.00, the test is saying that you have $250.00 left over per month to disburse to your general unsecured creditors so you should not be able to file Chapter 7. It further is stating that if you do want to file for Bankruptcy relief, your option is to file a Chapter 13 and enter into the Court Administered Payment Plan over 3-to-5 years. If, however, your disposable income is negative, then the test is saying you have no money to pay your general unsecured creditors so you do qualify to file Chapter 7 Bankruptcy.
What Is Chapter 7?
Chapter 7 is a form of Bankruptcy wherein your income cannot support to pay your debt so you enter into this liquidation chapter. Here, you are authorizing the Court to liquidate your Non-Exempt assets and pay those funds to the creditors. This is the most common type of Bankruptcy and generally lasts 3-to-4 months. In most cases, we are able to Exempt all of a person’s assets and therefore, they get to keep everything they have. At the end of the case, they receive a Discharge, eliminating their personal obligations to pay back certain debts.
What Is Chapter 13?
Chapter 13 is a form of Bankruptcy where you enter into a 3-to-5-year payment plan through the Bankruptcy Court. In this payment plan, you are paying back certain debts and possibly not paying certain debts, depending on your personal situation. As long as you successfully complete this payment plan, you receive a Discharge (just like someone does in a Chapter 7) at the end of the case, eliminating personal obligations to pay back certain debts.
As stated above, if a person does not qualify for Chapter 7 based on their income, their other Bankruptcy option would be to enter Chapter 13. While there are several reasons a person might file a Chapter 13, one of these reasons is if their income is too high. The Court will compare the person’s income (based on the prior 6 months) to the median income in that state based on their household size.
Do I Include My Social Security Income On The Means Test?
Generally speaking, you must include all forms of income in the 6-month analysis on the Means Test. Meaning, if you are self employed and receive income from your business, it must be included; if you work for an employer, you must include that income; if you are unemployed and receive unemployment, you must include it.
However, the one common exception that we regularly see is with Social Security Income. Any income derived from the Social Security Act is not required to be included in the 6-month analysis in the Means Test. This can become very important for a lot people considering to file for bankruptcy relief. For example, a couple considering to file for Bankruptcy will need to complete the Means Test. Let’s assume one of the spouse’s works and earns $80,000.00 annually. Further, let’s assume the second spouse is on Social Security benefits and receives $24,000.00 annually. If they were required to include those Social Security benefits in the test, they would not qualify for a Chapter 7. However, since they are not required to include those Social Security benefits in the test, they do in fact qualify for Chapter 7.
What Should My Next Step Be?
If you are struggling with your debt and are on a fixed income such as Social Security benefits, please reach out to our dedicated bankruptcy attorney to discuss what options you have. Our phone number is 916-800-7690 and you can call 24/7 to schedule a free consultation. You can also click HERE to schedule your free consultation online.
