If you’re struggling with overwhelming debt in New York and considering filing for Chapter 7 bankruptcy, one of the key eligibility requirements is passing the bankruptcy “means test.” This test evaluates your household income to determine if you qualify for a Chapter 7 straight bankruptcy, where your unsecured debts like credit cards and medical bills may be discharged.
The means test uses your current monthly income (CMI) over the six months prior to the month you choose to file for bankruptcy. However, calculating your CMI isn’t as straightforward as just looking at your paycheck stubs. There are specific guidelines on what types of income must be included in the means test calculation.
In this guide, we’ll explain exactly what income is counted for the Chapter 7 bankruptcy means test in New York, so you can determine if you’re likely to qualify. We’ll also provide some examples to illustrate how the process works. Don’t hesitate to talk to bankruptcy attorney John D’Amato for more legal guidance.
Understanding the Bankruptcy Means Test
The means test was introduced as part of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Its purpose is to prevent higher-income debtors from abusing the Chapter 7 bankruptcy system by discharging debts they could potentially pay back through a Chapter 13 repayment plan. The means test has two parts:
- Median Income Test: Your average household income over the six months prior to filing is compared to the median income for a household of your size in New York. If your income is below the median, you automatically pass the means test.
- Disposable Income Calculation: If your income exceeds the median, you must complete a more detailed calculation of your allowable expenses to determine your disposable income. If it falls below a certain threshold, you may still qualify for Chapter 7.
So what exactly is considered “income” for the purposes of the means test? Let’s take a closer look.
What Income Must Be Included?
For the means test, your current monthly income (CMI) includes almost any type of money or funds you receive on a regular basis, even if it’s not from employment. According to bankruptcy law, CMI encompasses:
- Gross wages, salaries, tips, bonuses, and commissions
- Net income from operating a business or profession
- Interest, dividends, and royalties
- Pension and retirement income
- Unemployment compensation
- Child support and alimony
- Regular contributions to household expenses from anyone outside your household.
The key is that the income must be received on a somewhat consistent, predictable basis. One-time gifts, loans, or irregular payments would not count as CMI. Note that in New York, you must include income for your entire household, even if your spouse is not filing bankruptcy with you (unless you are legally separated). This includes their wages, investment income, child support received, and the like.
Calculating Your Current Monthly Income
To calculate your current monthly income for the means test, you’ll need to:
- Determine your total gross household income received during the six full calendar months immediately prior to your bankruptcy filing month. For example, if you plan to file in June, you’d look at the income received from December through May.
- Add up the total income from all sources for those six months.
- Divide that six-month total by six to get your average current monthly income.
Let’s look at an example to illustrate: John is married and has two children. He plans to file for Chapter 7 bankruptcy in June 2024. For the six months from December 2023 through May 2024, John and his wife had the following income:
- John’s wages: $45,000
- John’s wife’s wages: $32,000
- Child support received: $3,600
- Interest and dividends: $1,200.
Their total household income for the six-month period was $45,000 + $32,000 + $3,600 + $1,200 = $81,800. Dividing $81,800 by six months gives them a current monthly income of $13,633 for the means test.
Comparing to New York’s Median Income
Once you’ve calculated your CMI, you’ll compare it to New York’s median income figures for a household of your size. The median income numbers are updated periodically, but as of April 1, 2024, they are:
- 1-person household: $69,135
- 2-person household: $87,550
- 3-person household: $105,435
- 4-person household: $131,389
- 5-person household: $141,289
- 6-person household: $151,189
- 7-person household: $161,089
- 8-person household: $170,989
- 9-person household: $180,889
(Add $9,000 for each additional household member exceeding 4.)
In our example, if the CMI is below the median income, the debtor would pass the median income portion of the means test. With John’s family of 4, the median income is $131,389 per year. Since their CMI of $13,633 per month (13,633 x 12 months equals 163,596) is above that, they would fail the median income portion of the means test. Specifically, their CMI exceeded $131,389. Therefore, John’s family would need to complete the second part of the means test: the disposable income calculation.
The Disposable Income Calculation
If your current monthly income is higher than the New York median for your household size, you’re not automatically disqualified from Chapter 7 bankruptcy. The means test allows you to deduct certain allowable expenses from your income to determine your true disposable income. This part of the means test follows a detailed form with instructions on calculating allowable deductions for things like:
- Housing and utilities
- Transportation costs
- Taxes
- Mandatory payroll deductions
- Court-ordered payments
- Health care costs not covered by insurance
- Term life insurance premiums
- Childcare and education expenses
- Telecommunication costs
- And more.
The allowable expenses are based on national and regional standards, not your actual costs. So for example, you’d deduct a standard allowance for housing costs in your county, rather than your actual rent or mortgage payment. If your disposable income after deducting all allowable expenses is below a certain threshold, you may still qualify for Chapter 7 bankruptcy in New York. The thresholds are:
- Under $9,075 – There is no presumption of abuse of the system, hence you are eligible for Chapter 7.
- Between $9,075 and $15,150 – May still be eligible if disposable income is not enough to pay 25% of non-priority unsecured debt over 5 years.
- Over $15,150 – There is presumption of abuse of the system, hence you may need to file Chapter 13 instead of Chapter 7.
It’s a very detailed and complicated calculation, which is why it’s highly recommended to have an experienced bankruptcy attorney assist you, especially if your income exceeds the median.
Special Situations and Exceptions
There are a few special situations where the means test income calculations may be handled differently:
- Business debts: You might not even need to apply for the means test if the majority of your obligations are business-related rather than consumer-related.
- Disabled veterans: Under the Honoring American Veterans in Extreme Need (HAVEN) Act, disabled veterans don’t need to include certain benefits in calculating their monthly income for the means test. This gives them better chances of qualifying for Chapter 7 bankruptcy.
- Non-filing spouse: While you generally must include a spouse’s income if not legally separated, there is an exception if you have a “household” but not a spouse, such as living with a partner or roommate. In that case, you would not include their income.
- Changes in income: If your income has changed significantly, whether increased or decreased, an experienced bankruptcy attorney can advise if it makes sense to delay your filing to use more current income figures.
As you can see, it can be complex to determine exactly what income counts for the Chapter 7 bankruptcy means test in New York. Having guidance from a qualified professional is crucial to ensure you don’t make mistakes that could jeopardize your eligibility.
FAQs About Income for Chapter 7 in New York
Q: How far back do I need to provide proof of income for the means test?
A: You’ll need to document your income received during the six calendar months leading up to your filing month, so have at least seven months’ worth of pay stubs, bank statements, and other income records available.
Q: What if my income has changed since the six-month look-back period? Can I use my current income instead?
A: The means test calculation is based on your average household income during the six calendar months prior to your filing month. If your income has changed significantly since then, it may affect your resulting average monthly income and consequently, your eligibility for Chapter 7. Consult an experienced bankruptcy attorney to see whether it would help you to delay your filing to use more current income figures.
Q: If I’m married, do I have to include my spouse’s income even if they’re not filing bankruptcy?
A: Yes, in New York you must include your spouse’s income when calculating your current monthly income for the means test, even if only one spouse is filing for bankruptcy. The only exception is if you are legally separated from your spouse.
Q: Do I have to include child support or alimony payments I receive?
A: Yes, any child support, alimony, or spousal maintenance payments you regularly receive must be included in your current monthly income calculation for the means test.
Q: What about income from a side gig or freelance work? Does that need to be included?
A: If you’re getting paid regularly, then yes, any income you receive from self-employment, freelance work, or operating a business must be included when calculating your current monthly income. This applies even if it’s not from traditional employment.
Q: Are Social Security benefits or disability payments considered income for the means test?
A: No, Social Security retirement and disability benefits are excluded from the current monthly income calculation under the bankruptcy means test rules.
Q: What if my debts are primarily from a business I own? Do I still have to take the means test?
A: If the majority of your debts are non-consumer debts, such as business loans, you may be exempt from the means test entirely when filing for Chapter 7 bankruptcy.
Q: Can I file for Chapter 7 bankruptcy if I have a high-paying job?
Having a high-paying job does not automatically disqualify you from filing for Chapter 7 bankruptcy in New York. The means test takes into account your household size and allowable expenses, in addition to your income. If your disposable income falls within the eligible range, you may still qualify for Chapter 7 bankruptcy, even with a high-paying job.
Q: Can I deduct any expenses from my income for the means test?
A: The first part of the means test simply compares your current monthly income to the New York median based on household size. If your income exceeds the median, you’ll then deduct allowable expenses based on IRS standards to determine your true disposable income.
Q: What if I don’t pass the means test? Does that mean I can’t file for bankruptcy?
A: Not necessarily. If you don’t qualify for Chapter 7 due to the means test, you may still be able to file Chapter 13 bankruptcy, which involves a repayment plan to pay back at least some of your debt. An experienced bankruptcy attorney can evaluate your best options.
Q: Should I try to reduce my income before filing to pass the means test?
A: No, any intentional attempts to manipulate your income solely for the purpose of passing the means test would be considered bankruptcy fraud, which is illegal. Always be fully honest and accurate when reporting your income.
Q: How long does the Chapter 7 bankruptcy process take in New York?
A: The Chapter 7 bankruptcy process in New York typically takes between four and six months from the time you file your petition until you receive your discharge order. However, the timeline can vary depending on the complexity of your case and any objections or issues that may arise during the process.
Q: Will filing for Chapter 7 bankruptcy affect my credit score?
A: Yes, filing for Chapter 7 bankruptcy will have a negative impact on your credit score, and the bankruptcy will remain on your credit report for up to 10 years. However, the impact on your credit score may be less severe than the damage caused by continuing to carry significant debt and missed payments.
Q: Should I hire a bankruptcy attorney for Chapter 7 in New York?
A: While not legally required, it is highly recommended to hire an experienced bankruptcy attorney to ensure, before you file for Chapter 7, that you qualify based on the income limits and means test calculation. An attorney can advise if Chapter 7 or 13 is better for your situation.
Why Work with Bankruptcy Attorney John D’Amato?
For nearly 30 years, John D’Amato has helped countless individuals and families in the Buffalo area find effective debt relief solutions, including Chapter 7 bankruptcy. As an experienced bankruptcy attorney, John can:
- Accurately calculate your household income for the means test
- Advise if you qualify for any special exemptions
- Complete the disposable income calculation if needed
- Ensure all bankruptcy paperwork is filled out properly
- Represent you through the entire Chapter 7 process.
John provides compassionate, personalized service and will take the time to understand your unique financial situation. He’ll explain all your options in easy-to-understand terms, so you can make well-informed decisions.
If you’re feeling overwhelmed by debt, don’t struggle alone. Contact John D’Amato PLLC today at (716) 703-9099 to schedule a free, no-obligation consultation. Regaining your financial freedom is possible with the right legal guidance.