Household Median Income Test in Bankruptcy

May 1, 2017

By Associate Attorney Jennifer Filipiak

In order to qualify for bankruptcy, federal law requires that a debtor fall below a certain income to qualify for a bankruptcy. This is called the median income, and is based on location and household size. It is determined by taking the monthly average of a debtor’s total gross income over a rolling previous six months. If a debtor is married, the spouse’s income must be listed regardless of whether the spouse is filing because the spouse contributes to paying the household expenses. The only exception is if the couple has been separated and living apart for more than six months.

If a debtor’s average monthly income in the past six full months is greater than the median income, then the court presumes abuse of the system and prohibits the bankruptcy. The debtor may overcome this presumption of abuse by listing certain “necessary” expenses. These expenses can be deducted from the average monthly income. These “necessary expenses” include: mortgage payments, vehicle payments, income tax, child support, union dues, health insurance, and many others

If a debtor is still above the median income, the court will only allow the debtor to file a Chapter 13 bankruptcy with payments over five years. The debtor will be required to pay back the equivalent of five years’ worth of the monthly income over the median to unsecured creditors. For example, a debtor who is $200 over will be required to pay back a total of $12,000 ($200 permonth times sixty (60) months).

The rules of the median income test require attorneys to obtain paystubs for the previous six full months if there is any indication that the debtor may be above the median income. Attorneys need these paystubs to calculate the average monthly “necessary” expenses and get the debtor past the presumption of abuse to file a bankruptcy.