In determining whether an individual should file Chapter 7 or Chapter 13 bankruptcy, the primary threshold question is whether the individual’s gross income for the past six months is below or above median for the jurisdiction in which the individual resides. The median income for a single household in the Greater Cincinnati and Dayton areas is currently $41,748.00. The median income increases with household size. For example, the median income for a household of two is $51,839.00; for a household of three it is $60,219.00; and for a household of four it is $72,827.00. If the gross household income earned during the past six months is below median, Chapter 7 may be available, and a Chapter 13 debt adjustment (consolidation) would require thirty-six monthly payments (information about both chapters may be found elsewhere on this website). Further, there is no strict minimum amount of debt that must be repaid in a Chapter 13. Individuals filing Chapter 13 bankruptcy frequently pay mere pennies on the dollar.
If the gross household income earned during the past six months is above median, however, Chapter 7 may still be available but is less likely, and a Chapter 13 repayment plan may require up to sixty monthly payments. In other words, with greater income comes a greater probability that more debt must be repaid before a discharge will be issued. In addition, if income exceeds the median, a “means test” is required that determines a minimum amount of debt to be repaid. For some, a recent loss of income, or a recent windfall (such as an employment bonus), may cause it to appear that more income is available for repayment than actually is. For those individuals, it may result in the inability to pay the minimum amount required according to the “means test.” Until recently, this meant waiting several months before filing a bankruptcy, which could be catastrophic if a foreclosure, a vehicle repossession, or a wage garnishment is pending.
On June 7, 2010, the United States Supreme Court issued a decision in the case of Hamilton v. Lanning, 130 S. Ct. 2464 (2010). In Lanning, the Supreme Court decided that debtors could pay less than the minimum required according to the “means test” if they can show a lack of sufficient income, and establish going forward their income will be less than during the past six months. This is a remarkable decision, and reflects a certain degree of sympathy the Supreme Court has for those facing emergency situations such as foreclosures, repossessions, and garnishments. The Supreme Court concluded that it is unreasonable to make debtors wait before filing bankruptcy simply because they appeared to earn too much during the past six months. Very good news.