Summer is here, and along with it often comes the opportunity to work overtime for seasonal industries such as construction and landscaping. Working overtime can be great for your family’s budget, but like any seemingly good thing, there can be a downside. If you are facing bankruptcy, then you must pass the “Means Test” in order to qualify for Chapter 7 bankruptcy.
Even if filing a Chapter 13 bankruptcy, it is important to have good Means Test numbers with regard to disposable income. And that’s where working a lot of overtime in a seasonal job can come back to bite you. In Missouri, the current median income for a single person is $44,994. In Kansas, that number is $47,591. If your annual income is below the median income for your family size in your state, then you automatically qualify for Chapter 7 bankruptcy. But, there’s a catch. The Means Test only uses the last 6 months of your income to calculate your annual income, not the last 12 months.
The formula has you total up your gross income from the 6 months prior to the month of your filing date, then divide that total by 6 and multiply by 12 to get your annual income. So, let’s assume you work in the landscaping industry and you average about $40,000 in income each year. You’re comfortably below the median income for either Missouri or Kansas, so you should easily qualify for Chapter 7 bankruptcy, right? Not so fast. Let’s assume that your busy season starts on April 1st and ends on October 1st. During that time of the year, you are working full time plus a lot of overtime. Because of how busy you are, you might earn $25,000 of your $40,000 annual income during those busy 6 months. However, from October 1st to March 31st each year, you might be lucky to work an average of 30 hours per week – there just isn’t that much landscaping and lawn work to do during those months. You might only make $15,000 of your $40,000 annual income during those slow 6 months.
Let’s assume you are having some financial difficulty and need to file bankruptcy. If you wait until October to file, your income will be calculated using the time period of April 1st to September 30th, when you made $25,000. That would equate to an annual income of $50,000 for the means test, even though you only make $40,000 per year. That means you’d be an “Above Median Income” filer, and your Chapter 7 bankruptcy would be much more complicated or worse: you might not qualify at all for Chapter 7 bankruptcy. Even if you wanted to do a Chapter 13 bankruptcy in order to pay off a car loan or catch up on delinquent taxes or home payments, an Above Median case means you must stay in your case longer than someone with Below Median income, and it might result in your paying an “Unsecured Dividend” to your general unsecured creditors (making your bankruptcy more costly). On the other hand, if you file in April, then your income will be measured during the slow months of October 1 to March 31, and your annual income in this example would only be $30,000. You’d be well below the Median Income for either state, and that’s a good thing in bankruptcy. An additional bit of good news is that an experienced bankruptcy practitioner knows a lot of “tricks of the trade” when it comes to the Means Test.
There are measures that can be taken and arguments that can be made to allow you to pass the Means Test or rebut the presumption of abuse to enable you to file Chapter 7.