5 Differences Between Tax Income and Bankruptcy Income in Las Vegas

Since the 2005 changes to the Bankruptcy Code, the biggest question for Chapter 7 Las Vegas bankruptcy debtors is, “What’s your income?” Congress believed people were abusing Chapter 7 by discharging large amounts of unsecured debt even though they had the income available to pay those debts as they came due. As a result, it required all Chapter 7 petitioners to satisfy a “means” test before proceeding with their cases. The means test requires that petitioners’ incomes over the previous six calendar months be less than their state’s median income. It’s an arbitrary number, but that’s what Congress chose.

Unfortunately, before petitioners can answer, “What’s your income?” they ask, “What is income?” The answer: Not necessarily what the IRS or state revenue authorities count as income. Since the purpose of the means test is to determine the debtor’s “average monthly income” over the previous six months, the calculation ends up being different. The following aren’t income for income tax purposes but are for bankruptcy:

(1) Inheritances

(2) Gifts

(3) Child support

(4) Disability payments

(5) A spouse’s income, if he or she isn’t filing

There are exceptions, the biggest being Social Security payments, but sometimes unemployment checks are excepted as well, though some bankruptcy courts believe unemployment replaces wages and should therefore be taxed. Usually only net gains are counted as income, for instance, the full income from a home sale wouldn’t count, just its appreciation in value. Because the means test period includes only the previous six calendar months, if a petitioner receives an annual bonus, it counts as his or her income; on the other hand, if the bonus occurred seven months earlier, it doesn’t count at all. This illogical allows Las Vegas bankruptcy attorneys to strategically plan bankruptcies around debtor’s annual windfalls. Again, some bankruptcy courts are addressing this by pro-rating things like bonuses but not teachers’ incomes because they don’t work in the summer.

If you have a lot of debt and various sources of income, filing a Chapter 7 bankruptcy can be quite a confusing challenge. Hiring an experienced Las Vegas bankruptcy attorney is the best way to ensure that your income is counted fairly to see if you pass the means test.

For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Freedom Law Firm Las Vegas bankruptcy attorney for a free initial consultation. Call us at 702-903-1459 to set up your free consultation.