As tax season approaches, many Sacramento area residents look forward to getting their refund checks over the upcoming weeks. Whether filing for Chapter 7 or Chapter 13, however, local residents must keep in mind that any income received is taken into account when qualifying for bankruptcy.
Few people realize that by receiving a significant tax refund they may no longer qualify for the bankruptcy. In order to qualify for Chapter 7 the individual must pass one of 2 income requirements. The first is the median income test. This means in order to qualify for Chapter 7 a person must earn less than the “average household income” for the same family size in his or her geographic region for the 6 months before the month in which they file the bankruptcy. The tax refund comes into play in this case because the median income test must account for all sources of income in the time period. Thus, if a person receives a significant tax refund they may no longer satisfy the median income test.
The second way to qualify for Chapter 7 bankruptcy is under the means test. The means test is a complex equation and comparison of a person’s debt to income ratio. In this test a person who makes more than the average income for his geographic region may still qualify for the bankruptcy provided their debts and monthly expenses rise to a significant portion of their income. Again, the receipt of a significant tax refund could effect the numbers enough so that the individual does not qualify under the means test either.