In New Jersey, it will be a little easier or a little harder to qualify for a Chapter 7 as of November 1, 2011. Whether it’ll be easier or harder for you depends on your family size.

The bankruptcy system looks to the U.S. Census to calculate each state’s median income, as applied to family size. If your income is below your state’s median income for your family size, then in most situations you would be eligible for a Chapter 7. But if your income is above the median and you still want to file a Chapter 7 case, then you have to fill out a long and rather complicated form detailing your allowed expenses to determine whether or not your filing of a Chapter 7 would be “abusive.” So if you want to file a Chapter 7 bankruptcy, it’s a lot easier if you’re below the median.

On November 1, new median income amounts become applicable. In New Jersey, for a household of 1, the median income level will rise slightly from $59,060 to $60,322.  For a household of 2, it will drop from $70, 680 to $67, 503.  The new figures for all states can be seen here. Remember, if the median income goes up, that makes it a little more likely that your income will fall below that median, and you’ll have smoother sailing qualifying for Chapter 7.  New Jersey has some of the highest median income levels in the U.S.

So, if your income is close to the applicable median amount, and the median is increasing for your family size in your state on November 1, then you have a better chance at falling under the median if you file on or after that date.

Please understand that the meaning of “income” in the bankruptcy context is different from conventional meanings of that word. Bankruptcy “income” is calculated using a six-calendar-month look-back period that is doubled and then divided by 12 for an average monthly income. It includes all sources of income from all family members other than social security and does not only include taxable income.

Because of this and many other complicated issues, you should consult with a bankruptcy attorney about median income questions.

Photo by Rafa.Garcés.

Related posts:

1. Must I report illegal or previously unreported income in my bankruptcy? It sometimes comes up that a person who wants to...

Related posts brought to you by Yet Another Related Posts Plugin.

The fact is, you need to tell your attorney about all of your income, regardless of whether it is derived from an illegal source or whether you think it is not taxable or should not count. Not all income is necessarily countable as such for certain purposes in bankruptcy – such as Social Security on the means test portion of the bankruptcy papers – but it all needs to be disclosed to your attorney so that their analysis can be completed accurately.

Illegal sources

A recent case from Pennsylvania highlights a problem with illegal income and failing to report it in bankruptcy. The debtor filed a Chapter 7 and received a discharge of her debts. Later, she was convicted of heroin and cocaine trafficking. As a result, the trustee for her bankruptcy case asked the court to revoke her discharge based on fraud, claiming that the debtor failed to report her revenue from her drug trafficking activities.

The court decided that while the debtor had a duty to report all income, even if it was from illegal activity, the trustee did not meet her burden of proof to show that there was a knowing and fraudulent intent behind the failure to report the illegal income. The trustee lacked basic evidence as to the amount of income and when it was received.

While the debtor in the Pennsylvania case prevailed in the trustee’s action against her, the case serves as a reminder of the pitfalls that await the debtor with illegal income. The debtor who has current income derived from illegal activity may wish to think twice about filing bankruptcy at all.

Unreported taxable income

And the potential debtor who has had income that was not reported to the IRS or to state taxing authorities when it should have been may wish to delay filing for bankruptcy until the tax issues have been defined more clearly. Specifically, any tax returns that should have been filed but were not need to be filed so that any tax debt or refund amounts can be set prior to filing. It is difficult to list a tax debt (or a refund owed to you) on your bankruptcy paperwork if you do not know exactly how much it is.

Additionally, you are required to provide your bankruptcy trustee with copies of your tax returns. Your case can be dismissed for failure to provide these copies.

Photo by Dave Dugdale.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

The means test is like a big IRS form with spaces for plugging in certain numbers and checking off boxes. If you’ve filed for bankruptcy in years past, you may not have seen it. The form was introduced as a result of the new bankruptcy legislation that Congress passed in 2005, which created more hoops for individual bankruptcy filers to jump through.

It has two main parts: The first determines whether your earnings are above or below median. The second is for those who are above median – it lets you take *certain* deductions from your income in an attempt to lower it to the point where you can qualify for a Chapter 7.

Obviously, it’s preferable not to have to fill out the second part of the Chapter 7 means test.

Those whose earnings vary during the year might be in a better position with regard to the means test than those with steady over-median earnings. Examples of people with variable pay over the course of a typical year include teachers, college professors, those who work solely or primarily on commission, and those who periodically claim unemployment insurance benefits because of temporary jobs or seasonal employment.

Many people credit their variable income for getting them into debt trouble to begin with, since they aren’t always able to afford their monthly payments steadily throughout the year.

How can earnings that vary over the year possibly be to your benefit? Because the means test only includes the earnings you received during the 6 months before your bankruptcy filing. If that prior 6 months encompasses a part of the year during which your income was lower, you have a better chance at your pay being below the median and qualifying for a Chapter 7.

So when considering the question of when you should file, think about filing soon after a period of lower income.

Photo by Anonymous9000.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

The picture over there on the right? Those are test tubes. I couldn’t resist – you’ll get it in a minute. Read on.

On November 1, 2009, the Census Bureau median family income for a one-person household in New Jersey goes up from $57,120 to $60,026. What does this mean to you? It could mean a lot, if you are planning to file a Chapter 7 bankruptcy in New Jersey.

Part of what you need to do to qualify for a Chapter 7 bankruptcy is pass the means test. If your income is below the median income for your household size, you pass the means test. If your income is more than the median, you may still be able to pass the means test by deducting certain allowed expenses from your income. The means test form is similar to an IRS form in that it tells you what numbers to put on which lines and allows for specific deductions.

So what about the median income going up in New Jersey? When the median income levels for your state go up, that might make it easier for you to qualify for a Chapter 7, depending on your income and on how much money you have left over at the end of every month.

But the median income is not going up for every state. For example, the median income for a single-person household in New York will actually go down a bit, making it just a bit more difficult for certain New Yorkers to qualify for a Chapter 7. The difference is not huge, though, and consumer bankruptcy attorneys in New York will probably just need to guide their clients in finding a little bit more in expenses to fit onto the means test.

And median income levels in New Jersey will not be going up the same amount for all household sizes. For a single-person household, the rise will be $2906; for a two-person household, it will go up $2147; for a three-person household, it will go up only $673; and for a four-person household, median income will only rise by $227 per year.

For each additional person above four, you will still add $6900 to the total median income for a four-person household, which is no more than you would add prior to November 1, 2009.

So if you are one of those one-person households needing a Chapter 7 in New Jersey who was a bit over the median income before, you might want to look into filing on or after November 1, 2009.

Related articles by Zemanta

• Q&A: What the ‘Middle-Class’ Recession Means for Bankruptcies (blogs.wsj.com)
• Census releases depressing income data, Maryland and New Jersey on top (dailyfinance.com)

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.