08 Jul I Make More Than the Median Income. Can I File for Chapter 7?
Several people have called me recently, saying that they wanted to file for Chapter 7, but couldn’t because their income was too high. In most cases, however, a high income–even one significantly over your state’s median income–doesn’t automatically disqualify you from Chapter 7. I’ve personally filed Chapter 7 cases for people who have incomes over $350,000, without difficulty.
How? The answer lies in how the Bankruptcy Code looks at the “Means Test.”
The Bankruptcy Code requires individuals to complete a “Means Test” when they file Chapter 7, 11, 12 or 13. The stated purpose of the Means Test is to make sure that people who can afford to repay some of their debt to do so by having them file for Chapter 11, 12 or 13 rather than Chapter 7.
The first requirement of the Means Test is to compute your household’s “Current Monthly Income,” or CMI. The joke among bankruptcy attorneys is that CMI is neither current, nor monthly, not income. This is because it is an average of the last six months (ending the last day of the month before you file) of only certain types of income. Social security, for example, isn’t included. Unemployment probably isn’t (the statute’s language is unclear). So if you lost your job 3 months ago, the income you used to make is still part of your CMI. And if you start a new job on the first of the month and file on the 30th, that income is not part of your CMI.
CMI includes your CMI, your spouse’s CMI, and the contribution made towards the household by other members of your household. Who’s in your “household”? No one knows; the Bankruptcuy Code doesn’t define the term, and there aren’t a lot of court rulings to help. A child that lives with you full-time is, but what about your college student, who comes home only during semester breaks? What about if you share custody of a child with an ex-spouse? What about an adult child who’s living with you? What about a parent? These, and other issues, remain to be decided by the Courts.
Once you have your household’s CMI, you then compare it to the median income for a comparably-sized family in your state. Note that you are comparing “household” CMI to “family” CMI, yet another example of poor draftsmanship in the Bankruptcy Code. If the household CMI is less than the family CMI, you “pass” the Means Test and can file for Chapter 7 (subject to other requirements of the Bankruptcy Code).
But that’s not the end of the computation.
If your CMI is too large, you are allowed to take deductions from it. These deductions are based on the standards the IRS uses to determine ability to repay or reduce taxes through an Offer in Compromise. A complete list may be found at the Department of Justice website. They include mortgage, car payments, food, clothing, utilities, etc.
Even if your CMI is too high, most people lower it enough through these deductions to “pass” the Means Test. But even if you don’t, you can still file Chapter 7. If your circumstances are such that it would be appropriate to let you receive a Chapter 7 discharge, the Court can still let your case go through.
And if they aren’t? Chapter 13 and Chapter 11 are still available.
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