Statement of Financial Affairs: Questions 1 and 2

This is the second in a series of blogs about the Statement of Financial Affairs and the questions it asks.

The first two questions in the Statement of Financial Affairs (SoFA) ask about income. Question 1 asks about income from employment or the operation of a business, and Question 2 asks about income other than from employment or the operation of a business. In other words, these two questions are designed to find out all the money coming into your hands.

These questions are historical: you are required to state not only your income from the beginning of the year to the date the case is filed, you are also required to state your income during the previous two years. This can result in your having to provide different amounts of information depending on when during the year your case is filed. For example, if you file on January 2, 2010, you have to list your income for the first two days of 2010, and all of 2009 and 2008. If you file on December 31, 2010, you have to list of your income for all of 2010, as well as 2009 and 2008.

You list your gross income, that is, your total income before any deductions for taxes, insurance, union dues, etc. If you’re self-employed, this means you list your total income before any expenses are deducted. If you get a paycheck, you can pull this year’s number from the Year to Date listing, and the past two years’ numbers from your W-2’s for those years. You should not use the Adjusted Gross Income from your tax return, since this figure may include a lot of deductions that are not appropriate for the SoFA. Even if you got paid in cash (and didn’t list the cash on your taxes) or worked “under the table” you need to include this income, and cen get in trouble if you don’t.

Note that if your business is a corporation or LLC, the amount that should be listed on Question 1 is not the business’ gross income, but the gross income that you personally received. If your business paid your personal expenses, or did not keep separate bank accounts (which it should!), you need to determine what the business paid you for your personal use.

If you are married, you should list your spouse’s income as well, even if your spouse is not filing. Interestingly, although the instructions require you to list this in Chapter 11 and 13 cases, they do not require that you list your spouse’s income in an individual Chapter 7 case. However, since this income is already disclosed on the Means Test, and many trustees across the country will expect to see it listed on the SoFA, I will list it as well.

While Question 1 is relatively straight forward, Question 2 can be more confusing. What is “Income  other than from employment or operation of business?” Does it include tax refunds, child support, 401(k) withdrawals, monetary help from family, Social Security, pension or retirement, and similar items? The answer is, “Yes.” Generally speaking, everything is included. Any money coming into or through your hands, or that is paid on your behalf, should be listed. Even though the means test does not require you to list Social Security income, for example, this question does. Note that local practice may exclude some of these items, and your bankruptcy attorney should know whether any of these items can be omitted.

Why do you need to provide all this information? It makes sense. By knowing what you’ve been bringing into the household, the trustee can determine whether your debts are consistent with your past history. For example, if you show credit card debt of $100,000 and total income for the past 3 years of $20,000, the trustee will have a lot more questions than if you’ve been earning $100,000 a year during this time. In the later case, the debt will be appropriate given the income; in the former case, it would appear to be much higher than would be expected. There may certainly be good explanations (it is old debt, or business debt, or domestic debt), but it would alert the trustee that a somewhat deeper questioning may be indicated.

Next: Question 3 (Payments to Creditors)

No related posts.