Have you ever received an unexpected bonus? Are you in sales and you just had a huge month?
Normally an unexpected spike in income is a good thing. For some, it’s a chance to go out and splurge on some retail therapy. For others, it might mean a few nights out on the town. And for some of you, it could be a chance to set something aside for a rainy day.
But, if Chapter 7 bankruptcy is on the horizon, an unexpected spike in income could mean trouble for you. Chapter 7 has income restrictions. If you make too much money before you file, even if it’s just a one-time fluke, then you might not qualify.
Get Out Your Calculator
Chapter 7 bankruptcy uses something called the “means test.” It’s a calculation that compares your income and family size against the standard income where you live along with certain monthly expenses that you are allowed to claim.
If your monthly income is lower than the median income for your family size, then you qualify for chapter 7 bankruptcy.
If your monthly income is higher than the median income, you may still qualify if you have enough expenses. Only certain expenses are allowed in this calculation, and it is best left to an expert bankruptcy attorney to figure it out for you. He or she will usually do this for free at an initial bankruptcy consultation.
Check to Check, Month to Month
The key question is, how do you determine your monthly income?
It’s not as simple as looking at the gross amount on your last pay stub. Rather, you must average your last six month’s worth of income prior to filing for bankruptcy.
This is where an income spike can be devastating to your case. A large bonus or banner sales month can make an otherwise average six months of income appear much higher for bankruptcy purposes. This could disqualify you for Chapter 7 bankruptcy.
Someone Spiked the Punchbowl
If you do have a surprise spike in income, there is a solution. You can simply wait until the spike is more than six months old, and then file your bankruptcy case.
You will have to be careful to avoid another spike, but it will be worthwhile if you have decided that bankruptcy is the right option for you. And if it looks like there will be multiple income spikes in your financial future, then you may no longer need to file for bankruptcy in the first place. The extra income might be all it takes to get out from underneath your debt.