What Is Included in the Determination of Income When You Want to Discharge Debt?
Under the current bankruptcy laws, to qualify to permanently discharge debts in a Chapter 7 proceeding, you must undergo what is known as the “means test.” The purpose of the means test is to establish whether you have disposable income or other resources to repay your creditors in a reorganization under chapter 13. How is your income calculated for purposes of the means test? What’s included and how does the court determine if you qualify?
Determining “Current Monthly Income”
The initial step in the means test is to identify what is referred to as “current monthly income.” To make this calculation, the bankruptcy court will gather information on all forms of income over a six month period, including:
- Earned income—wages, salary, commissions and bonuses
- Investment income—dividends and interest payments
- Self-employment or business income
- Income from retirement plans—IRAs, 401 (k)s, annuities, deferred compensation, and pension plans
- Some types of Disability income
As a general rule, the court will total all income for the six month period and divide it by six. The court will then look at the median income in your state (for a household with a similar size). If your current monthly income falls below the median, you will qualify to seek the discharge of debts under Chapter 7.
Just because your income exceeds the median, though, does not necessarily mean you cannot file under Chapter 7. The court will then need to establish how much “disposable income” you have, a far more complex process.
Contact Our Offices
At the Law Office of Andrew B. Finberg, LLC, we bring comprehensive bankruptcy counsel to individuals in Burlington, Camden and Gloucester counties in New Jersey. To schedule an appointment, call our office at 856-988-9055 (toll-free at 866-721-7269) or contact us online.