Law Offices of Jennifer L. Holland
BANKRUPTCY LAW AND
THE INCOME TEST
New bankruptcy laws went into effect in October, 2005. The new laws force certain higher income persons into a 5 year partial repayment bankruptcy (called a Chapter 13), rather than allowing a no payment Chapter 7 consumer bankruptcy, which takes only 4 months. Higher income is defined as income over "median income".
In Alaska (as of 11/1/24), median income is as follows:
Size of Household Total Income
1 $ 74,714
2 $ 96,165
3 $107,354
4 $123,984
+$9,900 for each additional household member.
These figures are updated by the U.S. Census generally every six months - THESE NUMBERS WILL CHANGE.
Income includes employment income, gifts, retirement distributions, some sales of assets, and permanent fund dividends (not including kids’ PFDs).
We have to obtain 6 months worth of pay stubs (or a summary from employers) - we add the gross income for six months and add in other income (for instance a $4,000 retirement hardship withdrawal) and divide by 6. This number is then multiplied by 12 and compared with the figures above.
This is much more complicated than it looks - you need an attorney for this process. Be careful, however, of pulling
retirement to pay bills before you see an attorney - you may put yourself over the limits for a simpler bankruptcy.
The definition of Household is a somewhat gray area - significant others can make this a more complicated determination. Again, you need an attorney. With respect to children, the split of physical custody and who claims the children on taxes makes a difference. If you have visitation (weekends and summer, for instance) that child is not likely to count as a household member even if you are paying significant child support. If you have physical custody of the child 3 days a week, that child is likely to count as a household member, if you are claiming him or her on your taxes.
If you are over the above median income, then a several page analysis begins - this is a combination of real expenses and IRS standard expenses. If you have a lot of secured debt (mortgages, cars), child support obligations, or high uncovered medical/dental, you may still avoid the 5 year bankruptcy. What you pay back in a 5 year bankruptcy is NOT NECESSARILY ALL OF YOUR DEBTS. The payment depends on the several page analysis. Some people are paying back a very small amount over 5 years, plus PFDs (adults only); others are making larger payments (depending on secured debts, child support, and uncovered medical/dental).
Income testing has become even more complicated due to decisions handed down by the various bankruptcy courts in the past few years. Seeking the advice of an experienced bankruptcy attorney is critical.