One factor in determining if you qualify for Chapter 7 is to compare your previous six months of income to median income for people in Texas, based on the household size.
Although you can be above median income and still qualify for a Chapter 7 bankruptcy, the easiest way to qualify is to be below median income for your household size.
Rather than show you those income amount for each family size, it is more important to note that there are some variables for determining the appropriate income to compare to median income.
Example 1 – Social Security exclusion: Single lady files her tax return showing no dependents, and her income is well over the median income level for a household size of one. However, she has her elderly parents living there, and their sole source of income is from Social Security. Even if her parents give $1,000 per month to help with living expenses, her appropriate household size is 3, and the appropriate household income is just her income, because Social Security is specifically excluded from the definition of “income” under the US Bankruptcy Code.
Example 2 – 401(k) cashout exclusion: The income from your job places you just a few dollars below median income, but last month you cashed out a 401(K) from a job that you left a year ago. Even though you received the money from the 401(k) in the previous 6 months, you should disregard it when comparing your income to median income. Why? Because the money from the 401(k) cashout was earned over 6 months ago. Although you are taxed on the cashout now, it was earned well before the previous 6 months.
Example 3 – former job exclusion: You come into my office for a consultation in January, and you are looking to file bankruptcy in February. You tell me that you had a high-paying job that ended at the end of December. You left that job with a severance check equal to three months of pay, and now you are looking at filing for unemployment benefits, because you are not receiving any income, and you’re looking for a job.
Although the income earned in the months of August through January would normally be used to compare to median income, the appropriate amount of income to determine qualification would be the unemployment benefits, as there was a substantial change in circumstances: loss of the job.
There are some special steps that must be taken to only use the unemployment benefits as the appropriate income to compare to median income. First, we file an Affidavit of Special Circumstances, which states that it would be unfair to use the income from the job that you no longer have.
Next, although you can jump into a low-paying job that places you below median income, you can’t jump right back into a high paying job during the 90 days that the case is open. After the 90 days is up, then the sky is the limit as to what you can earn. Practically speaking, it will likely take you more than 90 days to find a high paying job. In the meantime, you can use the money from the severance check to live on while you find an appropriate job.
In this example, we would need to make sure that the cash from the severance check is exempt, but that is the topic of a different post.
The point here is that you want to know how bankruptcy may apply to your specific situation. In order to find out, you need to speak with someone that does this work for a living.
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