Median income is a benchmark in bankruptcy, which can determine whether or not you qualify for chapter 7 bankruptcy. Chapter 7 bankruptcy is the chapter where your debts are wiped out. if your income is under the median income for your household size, then you are automatically eligible for chapter 7 from an income standpoint. However, if your income is over median, then more analysis is needed in the form of a means test. Ultimately it is the “means test”, not the median income which will determine definitively whether you are eligible for chapter 7 bankruptcy or not. If you are not eligible for chapter 7 bankruptcy, the means test is also used to determine what percentage of your debt you will be required to repay in a chapter 13 bankruptcy.
Chapter 13 repayment can can vary from 1% repayment to 100% repayment based on means test analysis.Often I hear people mistakenly refer to the “means test” when they are merely referring to “median income.” The two are related, but not the same thing. Median income is the first step in analyzing chapter 7 eligibility, but if you are over a median income, the means test is also required. I’ve observed many of my clients mistakenly assume that income is calculated based on the most recent tax return. Instead, the bankruptcy code requires the income calculation based on the most recent six previous whole months. We normally use pay-stubs to calculate gross income for the most recent six month period. Median income numbers are published normally every six months.