What is Income under the Chapter 7 Bankruptcy Means Test?

July 27, 2011

By: David M. Serafin

Under the Means Test created per the new bankruptcy laws, “higher income” debtors in Colorado with mostly consumer debts will not be eligible for chapter 7 bankruptcy and will be required to pay back some or all unsecured debts back in a chapter 13 payment plan. The Means Test requires calculation of all gross income received for the six full months prior to the bankruptcy filing date, except for Social Security retirement income. The Means Test definition of income in bankruptcy often includes items, such as gifts or distributions from a Roth IRA, not deemed taxable income under the Internal Revenue Code. As a Denver bankruptcy lawyer, attorney David M. Serafin will advise as to whether you pass the Means Test.

A key question under the Means Test is whether money received from a relative or friend is a gift or loan. Gifts are considered income under the Means Test and may push a debtor into chapter 13 bankruptcy (or increase the plan payment for an existing chapter 13 debtor) while a loan is not income. Note that a loan creditor must be listed in the schedules and, under the law against preferential transfers, certain pre-bankruptcy loan payments can later be rescinded by a bankruptcy trustee depending on the timing of the payments, amounts paid and the relationship of the creditor and bankruptcy debtor.