When Congress enacted the Bankruptcy Abuse and Prevention Consumer Protection Act of 2005 (BAPCPA), it included a “means test” to determine whether a debtor qualifies for a Chapter 7 discharge. The means test is based on the annual median income for the household, and requires a the submission of a Statement of Currently Monthly Income and Means Test Calculation. If a debtor’s “current monthly income” or CMI is below the median income for the debtor’s state of residence and number of dependents in debtor’s family, then the presumption of abuse does not arise and the debtor will qualify for a Chapter 7 bankruptcy without completing the remainder of the Means Test. 

The first step in completing the Means Test is determining CMI. The Bankruptcy code defines CMI as the average monthly income from all sources that the debtor receives “without regard to whether such income is taxable income” derived during the 6-month period proceeding the bankruptcy filing. See 11 U.S.C. 101(10A). Not all income, however, is included in determining CMI. The taxability of income is not determinative. For example, a regular gift of money might be included in a CMI calculation where a single gift of money might not regardless of whether the gift is taxable. The bankruptcy code also includes specific exemptions of certain sources income. Benefits received under the Social Security Act, for example, are specifically excluded in CMI calculations as are payments to victims of war crimes, crimes against humanity, victims of international terrorism or domestic terrorism. See 11 U.S.C. 101(10B).

Due to economic conditions, another common source of income for debtor’s is an IRA. Disbursements from an IRA, although potentially taxable, are not considered income for purposes of calculating CAI. See Shikaro Zahn v. Fink (In re Shikaro Zahn), 391 BR 840, 846 (8^th Cir. BAP 2008). In holding that IRA disbursements did not constitute as income for purposes of determining CMI, the Shikaro Zahn court reasoned that when withdrawn, the IRA funds were simply a liquidation of an existing asset. The same rationale applies to tax refunds from a prior taxable year. The funds should not be counted twice, once when earned and again when received as a refund. Disbursements from a 401(k), however, are not as easily defined. The Shikaro Zahn court limited its opinion to an IRA accounts. In a footnote, the court noted that mandatory withdrawals from 401(k) accounts may satisfy the definition of CMI leaving the door open for interpretation. If you have a question regarding 401(k) disbursements you should consult an bankruptcy attorney in your area.

- Richard V. Stokan, Jr.