Year-End Bonuses, Extra Income And Bankruptcy

October 20, 2011 by  Filed under: Bankruptcy 

If you’re a high income earner, timing could be everything when determining if you qualify for a Chapter 7 bankruptcy as opposed to Chapter 13 bankruptcy. In some states, the median income for a household of one person is $38,294 and two people is $55,178. That means that if you’re a single person considering bankruptcy earning more than $38,294 obligates you to take the means test. The same rule applies for married couples who earn more than $55,178. This is where year-end bonuses and extra income could mean the difference between qualifying for Chapter 7 bankruptcy or being forced to repay debts in Chapter 13 bankruptcy. Let’s take a look at how bankruptcy debtors should handle extra income and/or bonus:

Know Your Timing

If you expect to receive a year-end bonus or extra income in the coming months, think about whether you should file bankruptcy beforehand. If you’re an above-median income earner, any extra income earned in the six months prior to taking the bankruptcy means test could disqualify you for Chapter 7 bankruptcy. This may not make a difference if you’re already way over the median income; but if you’re right on the edge, then speaking with a bankruptcy attorney about timing your bankruptcy filing around bonuses might be prudent.

On the other hand, if you receive sporadic bursts of extra income because of a side business, then timing your bankruptcy may be more difficult. Take a look at the past year and try to find any patterns which might emerge. Do you receive a certain surge in income due to holiday sales? Does spring time bring a slump? Whatever the case, try to time your bankruptcy filing so that the means test will only examine the down months when determining your monthly income.

Consider Turning Down Extra Income

This may be a radical approach but turning down extra income could make the difference in paying thousands of dollars towards debt or discharging that same debt in bankruptcy. If more income will place you over the median income level and disqualify you for Chapter 7 bankruptcy, then you may be better off forgoing it. Speak with an experienced bankruptcy attorney before taking this option. If turning down extra income won’t qualify you for Chapter 7 bankruptcy, then you could end up sabotaging your own Chapter 13 bankruptcy plan which could spell trouble if you want to keep things such as your financed house or car.

Disclose All Income

It’s important to note that even if you do take the bankruptcy means test before receiving a year-end bonus or extra income, you must still inform the bankruptcy court that you expect to receive these assets. It doesn’t necessarily mean that the bankruptcy trustee will seize the income; but since the income is a future expected asset it must be disclosed. Speak with your bankruptcy attorney further about this requirement.

Reed Allmand, sponsoring attorney for, is constantly looking for ways to provide the best financial information for his clients. Whether you are considering filing for bankruptcy, or are currently going through a Chapter 7 or Chapter 13, visit for up to date news and information you need to know.

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