Median Income Used for Chapter 7 Eligibility Calculations
Income plays a large role in bankruptcy calculations, particularly if you are filing a Chapter 7 petition. Since Chapter 7 bankruptcy allows debtors to avoid up to five years of payments that are necessary in a Chapter 13 bankruptcy, debtors often prefer it. As a result, the courts devised a series of income tests you must undergo if you intend to file Chapter 7. The median income test is one of these.
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State Median Income
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One of the greatest determining factors in whether or not you can qualify for Chapter 7 bankruptcy is actually your state of residence. Since states have widely varying average incomes, you must use your state's median income to qualify for Chapter 7, rather than the federal median income. If you live in a high-income state, you can theoretically qualify for Chapter 7 more easily than if you live in a lower-income state. However, you are also more likely to have a higher average income yourself if you live in a high-income state.
Household Size
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The number of people in your household also affects the median income calculation when qualifying for Chapter 7 bankruptcy. The larger the number of people in your household, the higher the median income under which you can qualify to file. This makes sense, as it takes more money to support a larger household. A single person making a certain amount of money may not qualify for or need to file bankruptcy, while someone making the same amount with a four-person household may be struggling to pay the bills. As a result, the U.S. Trustee uses Census Bureau median income data for households of up to four people, with an additional $7,500 added for each additional person after four.
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Current Annual Income
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Since you are an individual, you cannot have a median income to compare against your state's median income. What the court uses as a basis for comparison is your "current annual income," as defined on Bankruptcy Form 22A. If you follow the directions for computing your current annual income, you will see that it is basically an annualization of your average monthly income for the six months before you filed bankruptcy. Specifically, Form 22A asks you to enter your average monthly income for the previous six months, then multiply this amount by 12 to arrive at an annualized figure. This is the number you must compare with your state's median income to determine if you can qualify for Chapter 7.
Means Test
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If you don't seem to qualify for Chapter 7 after performing the median income calculations, you may still qualify under the means test. If your income is too high, follow the instructions on Form 22A and complete the remainder of the form. After you subtract various expenses, such as utilities and living expenses, from your total income, you may arrive at a number that still qualifies you for Chapter 7 bankruptcy. The lower the amount of income you have after listing your expenses, the more likely you are to qualify for Chapter 7.
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