In 2005 Congress reformed the Bankruptcy Code and created what is called the Means Test. One of the key components of the Means Test is the calculation of current monthly income to determination if someone has monthly disposable income. Disposable income is theoretically the amount of money someone can afford to pay back their debts each month. If there is disposable income, then that income should be paid to creditors in a Chapter 13 bankruptcy case and a Chapter 7 bankruptcy should not be filed. So what is income when filling out the Means Test?
Generally all income earned or received during the six-month period prior to a bankruptcy case being filed must be included in the Means Test, or "All figures must reflect average monthly income received from all sources, derived during the six calendar months prior to filing the bankruptcy case, ending on the last day of the month before the filing. If the amount of monthly earnings varied during the six months, you must divide the six-month total by six, and enter the result on the appropriate line." The earnings listed is therefore a six-month average. The result of the six-month average can vary widely depending upon whether income is received from self-employment, or someone is employed and receives a salary that stays the same each month.
What Should Be Included
There are many types of income that must be listed or counted in the six-month average of income received prior to filing bankruptcy. The most common are wages, tips, self-employment income, income from operation of business or farm, child support, family support, alimony, pension income or retirement income. Some of the not so common sources of income are food stamps, rental income, sale of stocks, interest, dividends, royalties, retirement account withdrawals, life insurance income or income from trust accounts.
What is Not Included
When creating the Means Test Congress carved out an area that is not included as income in the Means Test. Social Security Act income is not income that will be counted in the six-month average. There is a difference of opinion from jurisdiction to jurisdiction whether unemployment income is considered Social Security Act income. You will need to consult an attorney in your jurisdiction to determine how the Courts make that determination.
Determining whether any monthly disposable income exists is a very important part of deciding what type of bankruptcy case to file. Filing out the Means Test is a complicated process that is different in each case depending upon sources of income and the specific facts of the case.
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