Thinking Of Getting Married and Filing Bankruptcy?

Let’s say two people live together (or are about to move in together). The man knows he must declare bankruptcy but not the woman. Is it better to be married or unmarried? It may be better to stay unmarried, at least until after the husband declares bankruptcy.

The reason is that it may be easier to pass the means test if the couple is not married.

First a few words on the means test:

In order to file for a chapter 7 bankruptcy, you must pass the means test. The Means Test is a test to determine if you make too much money to declare Chapter 7 Bankruptcy.

The Means Test works like this:
Means test step 1: Your income is compared to the median income for a similarly-sized family in California.

If your income is less than the median income then you pass. – no Step 2.

Means test step 2: But if your income is more than the median income then you have to go to Step 2. In Step 2 you subtract expenses from your income to see if you have anything left. If you have any more than a few dollars left over you are presumed to be ineligible to file a Chapter 7 bankruptcy. This is called a “presumption of abuse.”

You might be thinking “That’s no problem. I can show plenty of expenses.” But for certain expenses (such as housing and transportation) you aren’t allowed to deduct your actual expenses. For these expenses, you are only allowed to deduct the allowed expenses.   The expenses you are allowed to deduct are the IRS National Standards: Food, Clothing and Other Items.

The size of the household is important because the larger the household the higher the median income.

Here’s a chart for San Diego County which is accurate as I write this.  It changes from year to year.

Chart of monthly income for households in San Diego County.

Who’s income are we talking about here?

Are we only talking about the income of the person that is filling or both the man’s and the woman’s income?

The answer is that if you are married you have to total both the filing person’s income and the spouse’s income even if one of them is filing.

But if the couple is not married then you add the filing person’s gross income to the amount of money contributed to the household by the nonfilling person’s income. That total is compared to the median.

Let’s take a household of 4 as an example. Let’s assume that the two people live together with 2 kids. As I write this, the median income for a household of 4 is $6,466.

Let’s assume they are married, the husband’s gross monthly income is $4,000 and the wife’s is $2,500. The total is $6,500. That couple’s income is over the median. They do not pass the “safe harbor” test. They have to go on and take a more complicated test that they may or may not pass.

Now let’s assume the couple is not married

It’s still a household of 4 so the median is $6,466. But if they aren’t married then the household income is computed differently. The non-filing person’s gross income is not added to the income. Only the amount that the non-filing person contributes to the household is added to the filing person’s income.

As stated above the filing spouse’s income is $4,000. Only the wife’s contribution to the household is considered. Let’s say she pays $200 per month in taxes and she sends her mother $100 per month. That brings her contribution to the household down to say $2,200. The total of the husband’s income and wife’s contribution to the household is $6,200. That’s under the median so they pass the means test.

In almost every case, the amount of income contributed to the household every month is less than that person’s gross income. After all some of the income almost always goes to taxes before it’s contributed to the household.

Therefore it is clear that the unmarried couple has an easier passing the means test.

Therefore people should consider filing bankruptcy before as opposed to after they get married.

Related Posts
  • Discharging Taxes in Bankruptcy Read More
  • Keeping a Credit Card, Omitting a Creditor Read More
  • Some Bankruptcy Considerations in Marriage, Divorce and after Death of Spouse Read More