Why is “median income level” important in a bankruptcy case? Understanding the Significance of Median Income in Chapter 7 and Chapter 13 Bankruptcy Cases
In bankruptcy cases, the debtor's income plays a crucial role in determining eligibility, repayment plans, and overall outcomes. One key aspect of income assessment is whether it falls above or below the median income level. This article explores the significance of being over or below median income in both Chapter 7 and Chapter 13 bankruptcy cases.
Chapter 7 Bankruptcy and Median Income:
Chapter 7 bankruptcy is designed for individuals seeking to discharge their debts through liquidation of non-exempt assets. Median income plays a significant role in determining eligibility for Chapter 7 and is assessed through the means test. Here is a link for the median income levels currently in effect and published by the U.S. Department of Justice, U.S. Trustee Program: https://www.justice.gov/ust/means-testing
1. The Means Test:
The means test compares the debtor's household income to the median income for their state. The median income levels are determined by the U.S. Census Bureau and are updated periodically. If the debtor's income falls below the median, they automatically pass the means test and are eligible to file for Chapter 7.
2. Below Median Income:
If the debtor's income is below the median, they are not required to complete the second part of the means test. This means they can proceed with filing for Chapter 7 bankruptcy without facing additional income-based restrictions.
3. Above Median Income:
If the debtor's income exceeds the median, they must undergo further calculations to determine their eligibility for Chapter 7. This involves assessing disposable income and deducting certain expenses to determine if enough income is available to repay a portion of the debts. If their disposable income is deemed sufficient, they may be required to file for Chapter 13 instead.
Chapter 13 Bankruptcy and Median Income:
Chapter 13 bankruptcy involves creating a repayment plan to pay off debts over a specified period, typically three to five years. Median income is also relevant in Chapter 13 cases, albeit in a different way.
1. Disposable Income Calculation:
In Chapter 13 bankruptcy, the debtor's disposable income is used to establish the repayment plan. Disposable income is determined by subtracting necessary living expenses from the debtor's income. Median income figures are crucial in setting the baseline for these calculations. In Chapter 13 cases, the Chapter 13 Trustee reviews the means test to determine whether the debtor is allocating all of their disposable income into the plan,
2. Below Median Income:
If the debtor's income is below the median, their repayment plan duration may be set for three years unless they choose a longer term. The debtor is required to devote all disposable income to repay their debts during the plan period.
3. Above Median Income:
If the debtor's income exceeds the median, their repayment plan duration is typically set for five years unless they propose a shorter term. The longer duration allows for a more manageable monthly repayment amount based on the debtor's disposable income.
Conclusion:
Understanding the significance of median income in bankruptcy cases is vital for individuals seeking debt relief. In Chapter 7, being below the median income level simplifies the process and qualifies the debtor for potential debt discharge. In Chapter 13, median income influences the duration of the repayment plan and the debtor's disposable income calculation. Consulting with a knowledgeable bankruptcy attorney is crucial to navigate the complex income assessment process and determine the appropriate bankruptcy chapter based on your specific financial circumstances.