Federal bankruptcy law changed on October 17, 2005, and made certain higher-income individuals ineligible to file a Chapter 7 bankruptcy, forcing them into a Chapter 13. The income threshold is based on the median family income, by household size, for the geographic region in which you currently reside.
The following Table contains the income threshold amounts, based upon family size for the State of Illinois, as of the most recent update on November 1, 2014:
||4 PEOPLE *
* Add $8,100 for each individual in excess of 4.
These numbers change frequently (often several times per year), based upon new census data, so for the most up-to-date figures please be sure to check: www.justice.gov/ust/eo/bapcpa/meanstesting.htm.
How is this calculation completed: Although the figures above are expressed as an annual amount, this is not how the calculation is actually done. You cannot simply compare the amounts shown on your tax returns to determine if you are over or under the threshold figure. The calculation is actually based upon the average of ALL of your (and your spouse’s and other household member’s) gross income over the six months prior to the filing of your bankruptcy case. This includes nearly ALL income received during this 6-month time period, including but not limited to wages (including all bonuses/commissions/overtime, etc.), pension/retirement income, annuities, alimony or child support, unemployment compensation, business, farm or rental income, etc. The only income that is not counted in this calculation are social security, SSDI, or SSI benefits, and LINK and welfare benefits. Occasionally, we can disregard potions of income from a non-filing spouse or other household member, if all of their income is not considered available for household use (for example, if your non-filing spouse has student loan, installment loan, and vehicle debts that are not included in your bankruptcy, the payment of these debts that they will still be required to make can be deducted from their income).
I’m over the income threshold. Now what? First, be aware that the six month average calculation only takes into consideration the 6-months prior to the month you are currently in. Therefore, if you file on January 31st, none of January’s income is considered – only July – December’s income is. On the other hand, if you file on February 1st, the calculation would be based on August – January income. Therefore, some Debtors who have recently experienced a decrease in income may benefit from waiting a month or two to file, as the months that are averaged together may show decreased income over time, making a Debtor who is ineligible to file this month due to income possibly eligible next month. A good example of this is with seasonal employees, such as persons employed in the construction industry, as there is usually a lull in the winter months that may make them able to file then, and not eligible in the summer when they are receiving a lot of overtime. However, the same scenario is equally applicable to someone who recently lost a job and went on unemployment, or obtained a much lower paying job, as any decrease in income would be averaged with the higher months to hopefully make you eligible to file a Chapter 7 eventually.
But my income is steady, and I am still over the income threshold. What then? Just because a Debtor is over the income threshold does not automatically mean that they are not eligible to file a Chapter 7. This is simply a “threshold” inquiry, and if over these limits, simply requires a longer calculation to be completed by your bankruptcy attorney. In certain situations, a Debtor’s gross income (as taken into account in the calculation) does not accurately reflect the amount of disposable income available to a them at the end of the month. For example, if a Debtor pays out a significant portion of his income in child support, then even when they are over the income threshold, after the child support deduction is taken into consideration, they typically have no remaining disposable income that is available for payment to creditors. Similarly, if Debtor’s have large payroll deductions for insurance or mandatory retirement (I find this especially true for municipal employees and teachers), then they may also be in the same boat. Other situations may include Debtors who owe a significant amount of priority debt (tax debt or child support arrears), or have large house or vehicle payments, as the calculation attempts to determine whether there would be any income left over that could be used to pay your other unsecured creditors. Lastly, there is a presumption that even if you have some income left over at the end of the month, if your unsecured debt is significantly high enough that you would be unable with the amount remaining to pay at least 25% of it back over a 60-month period, then it is not worth it to the Court to push you into a Chapter 13, and you will still be eligible to file a Chapter 7. As you can see, there are a multitude of ways for a Debtor to still be eligible to file a Chapter 7, even if they are over the income threshold. The only way to really know one way or the other, is for a Debtor to bring in his/her paystubs, and for our office to do the complete calculation.
What if after all this, I still make too much and am ineligible to file a Chapter 7? If a Debtor is over on the income threshold and deemed ineligible for a Chapter 7 due to having excessive income available to them, the Debtor can still file a Chapter 13 bankruptcy. In such instances, however, the Debtor’s Plan in a Chapter 13 is required to be a 5-year Plan, unless the Debtor can pay 100% of the debts owed in less than 5 years. The calculation of 6-month’s average income will be used to determine how much income is left over and available for payment to unsecured creditors in your Chapter 13 Plan. Depending on your income and the amount of debt, this could be a payment to your creditors of anywhere between 0 – 100% (some further deductions are allowed in the Chapter 13 calculation that are not allowed in the Chapter 7 Means test calculation, such as voluntary contributions to retirement accounts and 401(k) loan repayments, so these could decrease your disposable income amount even further).
Lastly, even though a Debtor may be eligible for a Chapter 7 based on income, certain individuals elect to file a Chapter 13 for other reasons. If a Debtor is behind on a secured debt that he wishes to keep, such as a house or a car, and he wants to keep these items of property, he will opt to cure the arrearages in a Chapter 13 Plan. A Chapter 7 will not save property in which the Debtor is not current at the time of filing (or if they fall behind during the pendency of the bankruptcy). Also, since a Chapter 7 case is a liquidation bankruptcy, if a Debtor has significant equity in property or other assets, in order to avoid having them seized and liquidated, they may desire to file a Chapter 13 – a Chapter in which Debtors are entitled to keep all of their property in exchange for entering into a repayment plan for the benefit of their creditors. Thus, some Debtors may need to file a Chapter 13 regardless of whether or not their income meets or exceeds the Means Test threshold for a Chapter 7.
As always, our office is happy to meet with you with regard to your specific asset, income, and debt situation. If you provide our office with complete income information, we can determine whether or not you are over the income threshold and can also complete the longer calculation if necessary, to determine your eligibility for either bankruptcy Chapter. Call us at 217-344-3400 to set up an appointment today!
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