Filing Bankruptcy And Your Income

Too many clients and potential clients have consulted with a bankruptcy attorney about filing bankruptcy and they insisted that they have no income. Upon questioning them, what they really meant is that they were not making as much money as they would like. Or they meant their gross income was not sufficient to pay all of their minimum debts. Or, their net income was at zero or close to zero.

While to normal humans, these ideas may be clear and true, to non-humans such as lawyers and bankruptcy trustees, they are false and incorrect. In reality, to a professional the only person without any income are the homeless. And guess what ---- they are not the people filing for bankruptcy.

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Income for bankruptcy purposes can mean many things. It can mean such things as: (1) the wages earned by an employee; (2) the wages earned by a self-employed or independent contractor; (3) money given to the debtor by family and or friends; (4) money loaned to the debtor by family and or friends; (5) unemployment compensation; (6) pensions or retirement; (7) VA income no matter how designated; (8) Social Security.

Chapter 7 bankruptcy cases use the term "Current Monthly Income" in two different ways. Firstly, for Schedule I, that income is the last two months. While for Form B22A (aka the Means Test), that is the average of the last six months. Often these two forms produce a different monthly income amount. That is expected and this by itself does not mean there is a problem.

Because of the changes to the bankruptcy code in 2005, all debtors must now prove their income. Proof of income means only written documents produced by independent third parties is accepted. Normally this is pay stubs from employers, bank statements, or pay advices from unemployment compensation.

Another twist to the idea of income is that the debtor never uses the income for the month in which he actually is filing bankruptcy. This is best explained by an example. Say a debtor files for bankruptcy in July. It does not matter what day in July. So for Schedule I, the income would be the months of May and June. However, the Means Test will use the income for January through June.

The math is simple. The bankruptcy attorney adds the gross income together for each of the months, and then divides by either two or six as the case may be. For Schedule I purposes, the deductions (if any) are listed with their average monthly amounts.

If the debtor also owns and runs a business, the attorney would list on Schedule I the average business income and expenses. Schedule I also details the usual family expenses. The Means Test uses some of these deductions and expenses as listed on Schedule I. Additionally, the Means Test has its own expenses and deductions that are allowed. An example is there is a deduction for a pager but not a cell phone.

In conclusion, bankruptcy laws and forms, as well as any given debtor's income amount, these are not simple and easy things to immediately grasp. For better or worse, it is best to have a bankruptcy attorney advise you and prepare you for filing bankruptcy.

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