Between the high cost of living and unexpected monetary problems such as job loss or medical emergencies, bankruptcy becomes necessary for many New Yorkers. However, many people don’t realize that the type of bankruptcy you file for has a drastic impact on your financial recovery process. If you intend to file Chapter 7 to hit the reset button on your finances, you first need to pass a means test designed to ensure you truly can’t afford to repay your existing debts.
How the Chapter 7 Bankruptcy Means Test Works
"Passing" or "failing" the test isn’t just based on one pay stub or even your previous year’s tax returns. Instead, the test examines an average of your income over the previous six months prior to filing for bankruptcy.
This test looks at any type of income you receive, including regular wages, child support, business profits, rental income, unemployment benefits, and retirement pensions. It also includes your spouse’s income (unless you don’t live together)—even if your spouse isn’t filing for bankruptcy.
In New York, you automatically pass the means test if your total monthly earnings fall below the median state-wide income for a family of your same size. As of mid-2021, those monthly median amounts sit at:
Single individual - $5,058
Family of 2 - $6,429.92
Family of 3 - $7,709.00
Family of 4 - $9,368.67
Family of 5 - $10,118.67
It’s important to understand that these amounts can and do change over time as the median income fluctuates in the state, which is why you need to talk to an experienced bankruptcy attorney before filing.
So, what happens if you make more than the current median amount? When your monthly income is above that threshold, you can potentially still pass the test based on an analysis of your finances. If your family would have little or no disposable income remaining after paying debts and certain required living expenses, you can still pass and apply for bankruptcy.
Going through Chapter 7 eventually stops the creditor calls and discharges most (but not all) of your debts, although you may lose certain assets that are sold off to pay your creditors. Be sure to check with a bankruptcy attorney to find out what exemptions are available to you and how you can best protect your assets and structure your finances to keep your head above water.
What Happens If You Fail the NY Bankruptcy Means Test?
When your income is above the median monthly level allowed, and you still have a certain amount of disposable income after paying debts and living expenses, you would fail the means test.
That isn’t necessarily the end of your ability to file for Chapter 7, however. Depending on your financial situation, you may simply need to wait longer to file, since your income may go down or costs may go up. Eventually, the six-month average calculation can put you within the amounts allowed. That's often the case when someone loses a job unexpectedly, as the average of your last six months of income may be much higher than what you are currently making right now.
If you fail the means test and you aren’t likely to pass it in the next few months, your other option is to file for Chapter 13 instead. This version of bankruptcy consolidates and reduces your debts, but doesn’t completely absolve them. You still have to pay back a reduced amount over a set period of time. For some people with a higher base income, this may be your only option.
Talk to an Experienced Bankruptcy Attorney Before Making Any Decisions
Both Chapter 7 and Chapter 13 have their pros and cons, and there are situations where you may also need to utilize other tools to secure your family’s financial future. Make sure to go over all the possible options for protecting the assets you’ve earned while getting back on your feet financially. Call to set up a consultation with Alatsas Law Firm today so we can help you move forward with a plan tailored to your unique situation.