You versus the Joneses: does other families’ income matter if you are filing bankruptcy?

Victoria Maydanik Before you file bankruptcy Leave a Comment

This may come as a surprise, but other families’ income does make a difference in your bankruptcy case.  Here is why: in the Means Test in your bankruptcy filing,  the court compares current median incomes with your gross income to assess your financial well-being and ability to pay creditors. Of course, your gross income (as compared to other households’ median income) is not the only factor, but it is one of the major factors and it can make a big difference in your case.  For example, the court would use this data to see whether you qualify to file a Chapter 7 case, or, if you are filing a Chapter 13 case with a payment plan, the results of the Means Test would often be a major factor in calculating how much you would be paying each month, and how long your payment plan would be.

Trick question: If people on average are worse off financially and median incomes are falling, does it make easier or harder for you to file bankruptcy?

The answer is: harder. If the median incomes are falling and your household’s income ends up being above median, even by a dollar, you have to go though secondary analysis on the Means Test and answer additional detailed questions about your income and expenses to figure out if you have any disposable income left to make payments to creditors.  It’s not an impossible task, especially if done by an experienced attorney, and it does not necessarily mean that you would not qualify to get the debt relief you are looking for, but it does make the case more complicated.

You may think that if people on average are worse off, and are losing money and see their incomes going down – while inflation and everyday costs continue to rise – that it would be made easier, not harder, for the public to resolve debt and improve finances, but that’s not how it works. If, let’s say, your gross annual income is 50K and if the median income for one person in your state is 52K, you would usually have no trouble qualifying for Chapter 7. If, however, median income falls to 48K while your income remains at 50K, you would be labeled as a debtor with over-median income and would have to jump through extra hoops to to try qualify for Chapter 7. While in reality your financial situation has not improved, the court says, in a way: “Gee, compared to everyone else, this person’s financial situation doesn’t look bad at all.”

Another trick question: Now that economy seems to be on track on recovery and we see reports of lower unemployment and bigger number of new jobs, are median incomes rising or falling?

The answer is: falling, at least in our state. Many of the new jobs are low-wage and people are not able to find the jobs they trained for; also, there are many people who suffered pay cuts or salary freezes, or who were able to find jobs after a period of unemployment but are not making as much as before. The court receives periodic updates from the Census Bureau about median incomes, and according to the most recent update released a few days ago, the incomes have gone down. According to this most recent update, which the court will use for analysis in all bankruptcy cases filed on or after November 15, 2013:  median income for one person in California went down to $47,798 (from $48,415 in April); for a family of two, median income went down to $62,009 (from $63,030); for a family of three, income went down to $66,618 (from $67,401).

If you are considering filing bankruptcy, timing is important – if your income is close to median, it may benefit you to file soon, before the court starts using new median income data in the Means Test and your income possibly ends up being over the median threshold. Do not delay discussing your situation with an experienced bankruptcy attorney.

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