If you make too much money, the law may not allow you to file a Chapter 7 at all. Current bankruptcy law instructs us to look at the household median income. What does this mean? The Department of Justice, using data collected by the Census Bureau, provides the bankruptcy courts with what is called “the median income” for each state, for households of 1 person, households of 2 people, and so on. Lets take the example of a household of 2, just a man and wife in Florida with no minor children and no one else living in the house. The Census Bureau has (theoretically at least) determined the total incomes for each of the households of 2 in Florida and made a vertical list of them from $0.00 at the bottom to the highest income (some millionaire’s income) at the top of the list -- the very highest income for 2 people in the whole state of Florida. So there is our list of incomes for 2 people, from lowest to highest. Now the Census Bureau looks for the income level exactly half way up the list. It is the income in the middle of the list, hence the name median (like the median in the middle of the road). This number is not the average income for households of 2, it is simply the number in the center of the list, half way up (or half way down if you like). Therefore half the incomes are higher and half are lower. That number, as of November 2017, for a household of 2 in Florida is $ 56,759. This number changes from time to time, usually twice each year, when the Census Bureau updates its number.
So, the first thing you do is determine your household size. Usually, it is simply the number of people living in the house. But if two people are just roommates splitting the rent, we would treat that as two households of 1 each. But in our example of a man and wife, we add up the annual incomes (“gross” incomes – before any taxes are taken out) of both people to determine the total household income. Even if just one person is filing bankruptcy, we are instructed to add up the incomes of both, a fact that often surprises people.
Here is the exact rule we are instructed to follow: Add up the gross (before taxes) incomes for everyone in the household for the past six completed months (you never count the month you are in, because it is not complete). Do not count Social Security payments (the law is unsettled as to whether we count Unemployment Compensation), but do count Child support and Alimony and any other income. Now take that six-month figure and double it. Now you have an annual income figure using the last six months as a current rate of income. Congress could have said just add up the gross income for the past 1 full year, but Congress felt the most recent 6 months was more predictive of your future income than the entire last year, so we use the last 6 completed months as a guiding rate of income to make an annual figure.
Now you compare your household annual income to the median income on the chart for your size household. If you are below median income then you can almost certainly file Chapter 7. If you are above median income, then it is said that you have “failed the median income test”, and you must move on to the next test to see if you can get in the Chapter 7 door a different way.
The next test is called the means test. The means test is designed to calculate how much you can pay your creditors each month while still having money to pay your basic living expenses The two tests, “Median Income” and “Means Test” almost sound the same, but they are different. In the first test, median income, we didn’t ask anything about your own circumstances – we just wanted to know how much income you have. In the “means test” we are now much more interested in your personal situation and monthly expenses because we are trying to determine if you have the “means” (the financial ability) to repay at least something to your creditors.
So the means test involves asking you such things as whether you have especially high monthly medical bills going forward. We are also interested in your mortgage payment amount, whether your cars are either paid for or whether you still have to make monthly payments. We want to know if you are paying child support or alimony. We want know if you have childcare expenses. Then the Court essentially puts together a budget for you. Some numbers in this budget come from your actual life, like your medical and child support expenses mentioned above. Other numbers in this budget are imposed upon you. For example, the Court won’t ask you how much you need for groceries each month; rather, the Court will tell you (from charts supplied by the Department of Justice) how much your household is allowed for groceries. Some of these numbers in the budget vary by region, and even the county of Florida that you live in. But at the end of the day, these numbers produce a budget. The budget is a tight budget; there is nothing in there for vacations or savings. It’s supposed to be just enough to let you live a sensible lifestyle, but no fluff. The Court then compares this budget with your income and determines whether you have sufficient income to cover your budget plus make a meaningful payment to your creditors. In some cases, your income may be less than this proposed budget, so there is no money left over to pay your creditors. In that case, we say you have “passed the means test” and you are permitted to file a Chapter 7 notwithstanding the fact that you failed the median income test. But In other cases, it may appear that you do have enough income to cover your budget with some money left over that could be paid to your creditors. In that case your only real option is to file under Chapter 13.
To sum up, in the means test the court determines your necessary monthly expenses, or how much you really need from your income to survive. The court will subtract these necessary monthly expenses from your income to see if there is a significant amount of money left over each month to pay your creditors. If the answer is no, you can file Chapter 7. If it is a yes, then you will not be allowed to file a Chapter 7 and only a Chapter 13 is available to you.
There is a loophole to all this inquiry into your income. This rule “overrules” the median income and means testing. If your debt is primarily business debt as opposed to consumer debt, then you are allowed to file Chapter 7 case regardless of your current level of income. Debts are classified as business debt if they were originally incurred for a profit making purpose. As a side note, the “business debt exception” is actually a bit of a misnomer and is more precisely called the “primarily non-consumer debt” exception. While dividing your debts into two groups, like “business debt” and “personal debt” is easier to understand, than “consumer debt” and “non-consumer debt” some debts that you might guess would be “personal debts” are not so classified. For example, personal IRS income tax liabilities are classified, surprisingly, as “non-consumer debts” so the “business/personal” dichotomy breaks down. The test the court will apply is whether more than 50% of your debt is “non-consumer.” If the answer is “Yes” you may file a Chapter 7 regardless of the median income test or the means test results.
As of the beginning of 2016, extra scrutiny started being applied to bankruptcy cases where debtors claim their debts are primarily non-consumer (“business) debts. The scrutiny comes from the Assistant U.S. Trustees who are part of the Department of Justice. It has become imperative that clients and their bankruptcy counsel spend time examining this issue in detail before a case is filed claiming that the debtor’s debts are primarily business debts. At Ruff & Cohen, we have years of experience in handling these cases. We carefully study your income and debts, using spreadsheets to compare the business and non-business debt. Our Jacksonville bankruptcy lawyers are prepared to defend their position when challenged by the Assistant U.S. Trustee.
Most people who file bankruptcy prefer to file a Chapter 7.
The Gainesville bankruptcy lawyers at Ruff & Cohen, offer free counsel in determining which bankruptcy chapter is most appropriate in your case. They have extensive knowledge and over 60 years of combined experience to help you in this difficult time.
Schedule a free consultation at the firm when you call (352) 364-8688!