If you’ve filed for unemployment because of Covid-19 and you’re considering filing for bankruptcy, first of all, know that you’re not alone. Many people are going through this same experience, and we want to help you get through it. For many individuals, financial problems caused by the pandemic may result in bankruptcy. At Craft Law Offices, with locations in Greenville, Morehead City, and Rocky Mount, NC, we want you to feel comfortable asking the tough questions about bankruptcy. As bankruptcy attorneys, we often hear our clients voice concerns about the process of filing for bankruptcy. It doesn’t have to be as scary as you think it is!
Here are some common questions about filing for bankruptcy if you’re currently on unemployment because of the Coronavirus:
- How do I qualify for a Chapter 7 when my average income included employed wages and unemployment?
When you file for debt relief under Chapter 7, you must meet income qualifications. When Congress changed the bankruptcy laws in 2005, it included an income requirement for Chapter 7 debtors (individuals who file for bankruptcy relief). Typically, debtors who do not meet the income requirements do not qualify for a bankruptcy discharge (debt forgiveness) under Chapter 7. Individuals with higher income levels typically must file a repayment plan under Chapter 13 to get rid of debts in bankruptcy. That said, asking whether it is better to file a Chapter 7 or Chapter 13 is a very good question to ask.
However, individuals who are unemployed or have a reduction in income during the coronavirus pandemic might now qualify for Chapter 7, even though they may have not qualified for Chapter 7 before the COVID-19 pandemic. The Means Test used in Chapter 7 cases measures your income during the six months before filing a Chapter 7 bankruptcy case. Therefore, if you have a reduction in income because you are out of work during the coronavirus pandemic, your income level may drop below the level required to receive a bankruptcy discharge under Chapter 7.
2. What are the income requirements for Chapter 7?
To file for bankruptcy relief, you must complete a bankruptcy form called the Means Test. The Means Test calculates your average income and compares it to the average income for households in your state. If you have four members of your household, your income is compared to the average income for a household of four in your state.
If your average income is higher than the median income for your state, you “fail” the Means Test and may not qualify for debt forgiveness under Chapter 7. Each state has different median income levels based on data gathered from the U.S. Census Bureau and the Internal Revenue Service. The figures are updated every few months to ensure that the income levels reflect current median income levels for each state. The most recent median income and household size by your state for filing on or after April 1, 2020 can be found here.
To calculate your median income for the Means Test, multiply your average monthly income (current monthly income) by 12. The Means Test has two sections. You could “pass” the second section of the Means Test to qualify for Chapter 7 even if your median income is above the state median income. We discuss the second section of the Means Test below after we explain how to calculate your average income.
3. How do I calculate my monthly income for Chapter 7?
Average or current monthly income includes all income received during the six months before filing for bankruptcy relief. Therefore, if you file a Chapter 7 bankruptcy petition on June 10, 2020, you must include household income received from December 1, 2019, through May 31, 2020. Add all income during those six months and divide the total by six to calculate your average or current monthly income (CMI).
All income must be included when calculating your current monthly income or average monthly income except for income received under the Social Security Act (i.e. Social Security, SSI, and SSDI benefits) or payments received by victims of war crimes or terrorism. Use gross income when calculating average monthly income, except for income received from rents or the operation of a business, profession, or farm. For rents and business income, you use the net income reported to the IRS after deducting necessary business expenses. Examples of income used to calculate the Means Test include, but are not limited to:
- Salary and hourly wages
- Overtime pay
- Interest payments
- Retirement and pension income
- Dividend and royalty payments
- Unemployment compensation
- Net income from rents or rental property
- Net income from the operation of a business
- Annuity payments
- Workers’ compensation income
- State disability insurance benefits
- Alimony and child support payments
- Regular contributions to household income by your dependents or spouse, even though they may not be filing for bankruptcy relief
4. How do I take the Chapter 7 means test?
The Chapter 7 Means Test is comprised of the following bankruptcy forms: 1) Chapter 7 Statement of Your Current Monthly Income 2) Statement of Exemption from Presumption of Abuse Under §707(b)(2) 3) Chapter 7 Means Test Calculation. Many people only need to take the first form, but we will walk you through everything to make sure it’s clear as it took us a long time to figure this out. First, you should know what your income is in bankruptcy terms. You have information about it above, but you may want to take the following calculator first to help.
For bankruptcy lawyers who are here to help you every step of the way, give us a call at Craft Law Offices in Greenville, NC. We’re ready to help you get your financial life back on track.