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Variable income and the Chapter 7 means test

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In qualifying for a Chapter 7 bankruptcy, means testing is not an issue for people whose pay is below the median for their state and family size, but for those whose income is more, it can be a problem.

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.

New Jersey household median income levels rising soon

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Two small test tubes in a test tube rack.
Image via Wikipedia

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.

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