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‘Bankruptcy Income’ Is Not Always ‘Tax Income’

Congress altered the bankruptcy code in 2005 to require debtors filing chapter 7 bankruptcy to demonstrate that their incomes are below the median family income for their state if their debts were primarily consumer debts. For single earners filing bankruptcy in New York, that figure will be $47,414 as of November 15. Debtors whose incomes are above this line must then rebut the presumption that their filings are abusive and should be transferred to chapter 13 or chapter 11. They can achieve this by showing that their incomes are below the median after subtracting certain expenses allowed by the bankruptcy code or by claiming they have special circumstances.

It can be a tedious task to determine one’s income, but sometimes debtors—particularly those trying to file without a bankruptcy lawyer—confuse the definition of “income” in bankruptcy with “income” for tax purposes. Simply put, the bankruptcy trustee can consider some types of income (in the broad sense) as applicable to the means test that would not be taxed by the IRS or state tax authorities. The difference can cost a debtor a chapter 7 filing. Here are some examples.

(1)  Disability payments

(2)  Child support payments

(3)  Gifts

(4)  Inheritances

(5)  Non-filing spouses’ incomes

In truth, some of these types of incomes are taxable income but often only after exempting a portion. For instance, in 2013 the first $14,000 in gifts given to individuals is tax free. Not so for the chapter 7 bankruptcy means test. In another example, non-filing spouses’ incomes are included to prevent people from evading their debts by relying on their working spouses’ earnings.

As to the exceptions: Unemployment benefits are considered income for the means test in New York, but some courts have said otherwise. Other questionable calls are withdrawals from retirement plans and income-tax refunds. The only bright line exception is Social Security benefits. These are not incomes for the means test.

Most people who file bankruptcy in New York have primarily consumer debts, so they will have to make an income calculation before proceeding with their chapter 7 cases. Not knowing what counts as income, however, can lead to serious difficulties, which is why it’s important to hire an experienced New York bankruptcy lawyer to handle your case.

For answers to more questions about the chapter 7 means test, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced New York bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA
718-855-6840
http://nybankruptcy.net/

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