An Annual Bonus in the Chapter 7 Means Test Is "Income"
All income other than for Social Security age or disability benefit earned in the 6 months prior to the month in which a Chapter 7 or 13 bankruptcy is filed must be reported and calculated in the "means test" which is the barometer for eligibility of a debtor for a Chapter 7 bankruptcy. An annual bonus in the Chapter 7 means test is "income" just like any regular wages earned in that same 6-month time-period. A one-time or annual bonus or other out-of-the-ordinary income receipt can alter the results of the test, making a potential bankruptcy filer ineligible for Chapter 7 and eligible only for a Chapter 13 "payment plan" bankruptcy. Let's look at how the test actually functions first to get an idea.
How Does the Means Test Work?
The means test is, on its face, a simple mathematical test for income eligibility. What it does is compute the gross annual income of the household of the person filing the bankruptcy (even including household members who are not themselves part of the bankruptcy). It averages the gross monthly income of all earning and contributing members of the household from all sources except Social Security (and unemployment benefits in some jurisdictions, though they must be included in my jurisdiction, the Eastern District of Michigan) for each of the 6 months prior to the month in which the bankruptcy was filed. So, for example, if a bankruptcy were filed in this month, June, 2012, the means test would look at the gross (before taxes and other deductions are removed) income from all sources from December 1, 2011 through May 31, 2012. Those monthly income totals are averaged together and then multiplied by 12 (months) to result in a hypothetical household annual income. That income is then compared by the means test with the median income for the state in which the bankruptcy is filed for that debtor's family-size. If the household income is higher than the median income, the debtor has failed the means test and must file a Chapter 13. Of course, the means test is not quite so simplistic. An experienced bankruptcy lawyer can properly apply various allowable deductions to the resulting household income to potentially sink an above-median income back down under the median income. Online "means test calculators" do a very poor job of accounting for these deductions and give many consumers who could use the protection and fresh start that a Chapter 7 bankruptcy provides the impression that they are "not qualified" and should not even take the time to discuss their situation with a bankruptcy attorney---unfortunately. The means test is at its heart a cynical mechanism designed and implemented by financial industry lobbyists and their cronies in Congress purely to force people who might otherwise be eligible for a Chapter 7 in which nothing is paid back on debts owed into a Chapter 13 in which at least something is paid back to creditors.
The Means Test and Annual Bonuses
One of the ways in which the means test can cruelly skew a household income average upward is the mere fact of the 6-month look-back averaging period described above. If a debtor happened to get some unexpected or at least irregular windfall, such as an annual bonus, in any one of those 6 months, it can cause the average to increase dramatically---and force a means test failure. How, then, do we deal with that? In some circumstances, we cannot. It is simply a fact of the means test that it will portray income in a way that does not mirror the financial reality of the prospective debtor's month-to-month circumstances. If a debtor needs to file to stop a garnishment or a lawsuit or for one of other "instant benefits" of the bankruptcy process, it may be something that he or she is simply stuck with. Otherwise, there is always the option of waiting a little while to file so that the month in which the annual bonus is received is no longer within the 6-month look-back period. Additionally, recent Supreme Court decisions have given debtors and their attorneys some latitude for applying a sort of "special circumstances" deduction to back the bonus back out of the income average if it is not a regularly received bonus but a one-time stroke of luck. (This is highly dependent upon individual circumstances!)
Annual Bonus in the Chapter 7 Means Test: The Bottom-Line
In short, the means test is what it is: a basis for forcing consumers to pay back something to their creditors when they might not have had to without the test. That was the intent of the test when Congress inserted it into the Bankruptcy Code in 2005, and that is what it does. But an experienced bankruptcy attorney can assist you with dealing with the means test in the best and most advantageous way possible. Such bonuses, along with overtime pay, expense reimbursement, relocation reimbursement or bonuses, or even military combat hazard pay, among other sources of "additional" income, should always be disclosed to your bankruptcy attorney. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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