Income Ceilings

Often a client will ask me the following question:

How much money am I allowed to make and still file for bankruptcy?

The client hopes that I can give him or her a number like $5,000 per month. Unfortunately, it’s not that simple. (Is it ever?!)

There are 2 income and expense tests that you must take and pass in order to file for a chapter 7 bankruptcy:

1) Test number one: The Current Income and Expense test (also known as schedules I & J)
2) Test number two: The Means Test

Test number one has been around for as long as I can remember. You submit forms to the court (schedules I & J) which list out what your income and expenses are now and what they will be in the foreseeable future. You leave off the expenses that you won’t have after you file for bankruptcy (for example your credit card payments).

If the forms (schedules I & J) show that after filing for bankruptcy you will have a monthly budget surplus, i.e. money left over every month after paying your bills then the court will find that it would be an abuse of the system for you to file for chapter 7 bankruptcy. The idea is that if you will have money left over every month then you should be filing for chapter 13 instead of filing for chapter 7. Then in a chapter 13 you can use the extra money left over to pay your creditors.  For this reason, I always work with my clients to try to show that there will be a budget deficit after filing the bankruptcy petition.

On I & J all income is considered except Social Security payments and Social Security Disability payments. Note: State Disability payments are counted – only Social Security Disability is not counted. Do you just leave it off schedule I? No the preferred way to handle it is to enter it on Schedule I. That might result in a budget surplus but the trustee won’t care as long as the surplus is less than the amount of the total of the Social Security or Social Security Disability payments.

Please go here to read about the differences between chapter 7 and chapter 13 and why you would want to use one rather than the other.

Since most people want to file for chapter 7 instead of chapter 13 it is often important to pass this test number one. By “pass” I mean that you show that you won’t have any money left over after paying your bills every month.

In 2005 Congress decided that Test Number One was not enough. In that year Congress enacted statutes setting up a second income and expense test – The Means Test. You now need to pass this one too if you want to file for chapter 7.

Instead of looking at your current and future income, the Means Test looks at your past income. It looks at your income for the 6 month period before you file for bankruptcy.
Essentially, the means test is a 2 part test:

Means test step 1: Your gross income (before taxes are withheld) income is compared to the median gross income for a similarly-sized family in California. If your gross income is less than the median income then you pass – no Step 2.

Means test step 2: But if your gross income is more than the median gross income then you have to go to Step 2. In Step 2 you go through a complicated calculation. It is something like filling out a tax return. The income for step 2 is your gross income minus deductions such as food, housing, etc.  But the allowable deductions are not the actual expenses.  Your deductions for food, shelter, transportation, etc. are limited to the IRS National Standards: Food, Clothing and Other Items.

For Means Test step 2, you also may deduct a portion of the amounts you pay every month on secured debt, such as car payments, mortgage payments.

Here is a chart showing the median income by household size in San Diego which is accurate on the date I’m writing this. But it changes from year to year.

Chart of the median income for households in San Diego County


You Pass!

There are various places to check to see the updated median income figures. I usually go here.

Only one spouse filing

If you’re filing bankruptcy but your spouse isn’t, do you have to list your spouse’s income?  The answer is yes.  You list the income of both spouses and the expenses of both spouses. However, if only one spouse is filing the income of the spouse that isn’t used for expenses of the household expenses is subtracted. This is called “The Marital Adjustment or the Marital Deduction.  This issue is also discussed here.

Here is the United States Trustee’s position on what expenses can be subtracted under the Marital Adjustment:
“All income of the non-debtor spouse should be included, except the following expenses of the non-debtor spouse may be excluded:

1) withholding taxes;
2) student loan payments;
3) prior support obligations;
4) debt payments on which only the non-filing spouse is legally liable and
where the consideration for the loan exclusively benefits the non-filing
spouse. (Credit cards used to pay for household expenses may not be
deducted on Line 17). ”

Spouses separated

There is an exception (to the rule that both spouses’ income is considered in the Means Test.  The exception is if you are separated.  If that case only your, the one who is filing for bankruptcy, income and expenses are listed.

What does “separated” mean?

Effective January 1, 2017 California Family Code 70 reads:
(a) “Date of separation” means the date that a complete and final break in the marital relationship has occurred, as evidenced by both of the following:
(1) The spouse has expressed to the other spouse his or her intent to end the marriage.
(2) The conduct of the spouse is consistent with his or her intent to end the marriage.
(b) In determining the date of separation, the court shall take into consideration all relevant evidence.
(c) It is the intent of the Legislature in enacting this section to abrogate the decisions in In re Marriage of Davis (2015) 61 Cal.4th 846 and In re Marriage of Norviel (2002) 102 Cal.App.4th 1152.
Current family code sections 771, 910, 914, and 4338, which all currently contain the previous language of “living separately and apart”, will now be replaced with “date of separation”, as defined by Family Code 70.

So, as you can see, the answer to the question of “How much money can I make and still file for bankruptcy?” doesn’t have a simple answer. It’s a multi-part test involving some computations.

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