Bankruptcy Means Test's Murky Waters

January 7th, 2009 by Reed Allmand

When massive changes to the bankruptcy law were implemented in 2005, the means test was designed to help clarify who qualifies for Chapter 7 bankruptcy, especially amongst high income debtors. Using "currently monthly income" was supposed to be the key to deciding if a debtor financially qualified for Chapter 7 bankruptcy; but now the courts are split on what exactly constitutes monthly income. Generally speaking, monthly income is determined by adding all income received in the six month period preceding a bankruptcy filing and dividing it by 6 (i.e. six months). But some bankruptcy courts have not only included income received; but also include income earned (whether it is received or not) to determine the monthly income of a debtor filing for bankruptcy. This generally would not affect a debtor working a regular job; but has huge implications for the bankruptcy filings of self-employed debtors who may invoice clients; but not receive the money until later.

For example, if a debtor filed for bankruptcy and had earned $600 a month; but only actually received $300 per month in the last six months, a bankruptcy court might decide that the debtor’s income was $900 per month or $300 per month depending on how the judge defines monthly income. This discrepancy could mean the difference between the debtor qualifying for Chapter 7 bankruptcy or having their case dismissed. If you’re a debtor considering Chapter 7 bankruptcy and have earned; but not received some income speak with a bankruptcy attorney to determine how this may affect your Chapter 7 bankruptcy filing.