When you finally reach out for help from a bankruptcy attorney for your financial problems, the attorney is likely to explain the differences between Chapter 7 bankruptcy and Chapter 13. After hearing the differences, you may instantly want to choose Chapter 7, simply because it offers a discharge of most unsecured debts; however, this might not be an option. You will first need to determine if you qualify, and a large part of this decision is based on your income.
Why Income Matters In Bankruptcy
The money you earn helps bankruptcy attorneys determine which branch of bankruptcy you will qualify for. When people earn a lot of money, the bankruptcy court will make them repay some of their debts through a Chapter 13 case. For people who do not earn a lot, Chapter 7 allows a fresh start by discharging many of the debts they may owe.
The way your attorney will determine which you qualify for is through a means test. A means test is used to compare your total income to the median income in the state you live in. The median income represents the average income of people living in your state, and every state has a different median income amount.
The median income in each state is also separated by family size. This is because people with more family members need more income to support these additional people, while people with a lower number of family members can often live on less.
If your income falls below the state median income, you will qualify for Chapter 7. If your income is above this amount, you will not qualify, which means you will need to use Chapter 13 if you want to file for bankruptcy.
How Your Income Is Calculated
To calculate your income, your lawyer will need to know exactly how much money you earned and received over the past six months. Once this amount is determined, your attorney will double it to get an annual income amount for you. Your income for the last six months will have to include a lot of different things, including:
- Wages from your job
- Any bonuses you received from work
- Income from self-employment or side jobs
- Money you received from an inheritance
- Lottery winnings
- Child support you received during this time
- Unemployment income
In addition, you will also need to claim income from anyone else living in your house. If you are married, you will have to include your spouse's income even if he or she will not be filing with you. Your median income must include all income from the household you live in.
Why Timing Is Vital
If your lawyer determines that your income is too high, he or she may review every type of income included in this figure. If there was some type of extraordinary income, such as lottery winnings, that caused your income to exceed the guidelines, your lawyer might suggest waiting to file for bankruptcy.
The bankruptcy court only looks at your income for the last 180 days. If you struck it big in the lottery 100 days ago, you might be better off waiting to file for bankruptcy for another 80 days. By doing this, you would not have to include the lottery winnings in your income, and this could drop your income below the median income in your state.
If you are struggling with money and cannot pay your bills, you may want to talk to a lawyer about your situation. Meeting with a bankruptcy lawyer does not obligate you to file for bankruptcy, but it can give you the advice and information you need to make a wise, informed decision about bankruptcy.