In the bankruptcy alphabet, nothing’s more important than income.  More of it is better, but too much could leave you out in the cold when it comes to Chapter 7 bankruptcy.

In the real world, income means money that comes into your pocket.  It may be regular, it may be a one-off event like a bonus or money you won.  In bankruptcy, however, the meaning of this otherwise inconsequential term is important for the means test. If your number is too high then you may be required to enter into a Chapter 13 repayment plan.

Actually, scratch that. If you number was too high then you may be required to file for Chapter 13 bankruptcy. What you’re bringing in now really has nothing to do with it.

That’s because the bankruptcy law looks to your average income over the past 6 months in determining your ability to repay debts. Even if you’ve just lost your job or taken a massive pay cut, we look backwards.

What’s Included In Income For Bankruptcy Purposes

Under the U.S. Bankruptcy Code, income includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents (and in a joint case the debtor’s spouse if not otherwise a dependent).

In other words, that $500 your brother gave you a few months back to tide you over isn’t going to count. The money you bring home from your paycheck, however, surely will.

What’s Excluded From Income

The U.S. Bankruptcy Code is pretty clear when it comes to what’s taken out of the calculation. Income excludes benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism or domestic terrorism on account of their status as victims of such terrorism.

Once You Know the Number, Match It Up

Figuring out your income level is one thing. From there, you need to know how you stack up against the rest of the people in your state. If you fall below the median level for a household of your size in your state then you automatically qualify for Chapter 7 bankruptcy without further inquiry.

Above the line? You may need to file for Chapter 13.

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Image credit: Leo Reynolds