Median Income In Bankruptcy And The Means Test

Here’s something many don’t realize.  You can earn above the median income for your location and household size and still qualify for Chapter 7  bankruptcy.

What’s that, you say?

You’ve read online (or, my favorite, a “friend” told you) that if you’re below the median income, you can file for bankruptcy without doing a repayment plan (such as in a typical Chapter 13 case) and if you’re above it, you cannot.


A Little Knowledge Can Be Dangerous

The eligibility requirements for filing bankruptcy, particularly Chapter 7 are extremely complex thanks to the changes in the laws that went into effect in 2005.     The median income is a part of the “Means Test” analysis which is ONE of the tests used to determine eligibility.   It is possible to be below the median income and still not be eligible for Chapter 7, and it is possible to be above the median income and qualify.    See more on how the Means Test Works in Bankruptcy

Below Median Income Doesn’t Mean Automatic Qualification

The median income is merely the starting point.  If you are below the median income, for the income you received from ALL sources EXCEPT social security in the six calendar months prior to commencing the bankruptcy case, then you “pass” the means test (or, more accurately, the means test will not apply in that case).

However, you can be below the median and your budget of “actual” current income and expenses showing surplus income that could render you unable to remain in a Chapter 7 case.

The Means Test and Why Above-Median Doesn’t Mean Automatic Disqualification

If you are above the median income, then the means test must be performed.  The means test is a mind-numbingly complex, and somewhat random, set of calculations that includes certain allowed IRS expense deductions from your income, and other actual expense deductions, such as mortgage payments, etc.   After going through the test, if you are showing the ability to make a certain amount of payments to your creditors,  a “presumption of abuse” will arise in the Chapter 7 case and you may need to either switch to a Chapter 13 repayment plan, or have your case dismissed.

Similar to the under-median case above, if you pass the means test as an above-median income debtor, you can still be ineligible for Chapter 7 based on your actual current income and expenses if they are showing a surplus available to pay your creditors, based on allowed expense criteria.

See an Attorney

In short, it is virtually impossible to correctly anticipate what will happen in your case without having a qualified bankruptcy attorney represent you, not to mention correctly completing the required means test and other forms.

This article is part of my bankruptcy alphabet series

Image Courtesy of Double–M