In bankruptcy, the dividing line between a simple chapter 7 and a complicated chapter 13 repayment plan can be whether you are above or below the median income. We normally run a 6 month average of your income and apply it to a means test to see where you fall on the median income line.
This morning I had a client whose income recently dropped from $110,000 to $40,000 a year. That $70,000 loss of income hurt, and he was considering bankruptcy. If I apply the 6 month average to his income, he is still above median, but that doesn’t mean he’s stuck in a high repayment chapter 13.
We can make a “Lanning” argument that his income dropped and won’t be going back up. Then, he qualifies for a more simple chapter 7 case.
The Supreme Court heard this issue in Hamilton v. Lanning, 560 U.S. ___, 130 S. Ct. 2464 (2010), in which a debtor’s current monthly income (6 month average) was much higher than her projected disposable income looking forward. The Supreme Court held that:
Consistent with the text of §1325 and pre-BAPCPA practice, we hold that when a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.
In other words, if the projected disposable income is virtually certain at the time of confirmation, the new income is the determining factor the the means test and any repayment plan. So if your income has dropped and it isn’t going back up any time soon, then you use your new, lower income figures.