Often a client will ask me the following question:

How much money am I allowed to make and still file for bankruptcy?

The client hopes that I can give him or her a number like $5,000 per month. Unfortunately it’s not that simple. (Is it ever?!)

There are 2 income and expense tests that you must take and pass in order to file for a chapter 7 bankruptcy:

1) Test number one: The Current Income and Expense test (also known as schedules I & J)

2) Test number two:  The Means Test

TEST NUMBER ONE - THE CURRENT INCOME AND EXPENSE TEST (ALSO KNOWN AS SCHEDULES I & J)

Test number one has been around for as long as I can remember. You submit forms to the court (schedules I & J) which list out what your income and expenses are now and what they will be in the foreseeable future. You leave off the expenses that you won’t have after you file for bankruptcy (for example your credit card payments).

If the forms (schedules I & J) show that after filing for bankruptcy you will have money left over every month after paying your bills then the court will find that it would be an abuse of the system for you to file for chapter 7 bankruptcy. The idea is that if you will have money left over every month then you should be filing for chapter 13 instead of filing for chapter 7. Then in a chapter 13 you can use the extra money left over to pay your creditors.

Please go here to read about the differences between chapter 7 and chapter 13 and why you would want to use one rather than the other.

Since most people want to file for chapter 7 instead of chapter 13 it is often important to pass this test number one. By "pass" I mean that you show that you won’t have any money left over after paying your bills every month.

TEST NUMBER TWO - THE MEANS TEST

In 2005 Congress decided that Test Number One was not enough. In that year Congress enacted statutes setting up a second income and expense test - The Means Test. You now need to pass this one too if you want to file for chapter 7.

Instead of looking at your current income the Means Test looks at your past income. It looks at your income for the 6 month period before you file for bankruptcy.

Please go here for a detailed explanation of the means test.

Essentially, the means test is a 2 part test:

Means test step 1: Your income is compared to the median income for a similarly-sized family in California. If your income is less than the median income then you pass - no Step 2.

Means test step 2: But if your income is more than the median income then you have to go to Step 2. In Step 2 you go through a complicated calculation. It is something like filling out a tax return. You can use a means test calculator to see if you pass the means test.

CONCLUSION

So, as you can see, the answer to the question of "How much money can I make and still file for bankruptcy?" doesn’t have a simple answer. It’s a multi part test involving some computations.