Bankruptcy

How are Year End Bonuses Treated in a Median Income Test Calculation?

By Jonathan

When I meet with a potential client, one of the first calculations I run is a "median income test" evaluation.   The median income test adds up your gross income from all sources during the six months preceding the month of filing, then divides by six to arrive at a monthly average.  If that monthly average exceeds the median income for a similarly sized family in Georgia (or other applicable State), then you "fail" the median income test and a "presumption of abuse" arises.  As a practical matter, above-median debtors often find themselves in a Chapter 13 repayment plan rather than a Chapter 7 liquidation.

How should the median income calculation deal with Christmas bonsues?  If we read the Bankruptcy Code literally, a Christmas bonus will distort your median income calculation if you file your case in January, February, March, April, May or June.  A June filing, for example, would look at gross income during December through May to generate a monthly average.  A July filing, by contrast, would look at gross income for January through June, and not count any Christmas bonuses.

If your household income is close to the median income test limit, you may find yourself waiting until July to file a case that otherwise could have been filed earlier.

My Bankruptcy Law Network colleague Jed Berliner recently wrote about a Massachusetts bankruptcy case in which the judge ruled that Christmas bonuses could be given pro rata treatment over twelve months, meaning that there would be no first half of the year penalty.  At the same time, of course, this interpretation means that July though December filers would not get the benefit of keeping the bonus out of the calculation.

I am not aware of any circuit court appeals cases that have ruled on this issue.  I suspect that it is only a matter of time, however.  There is also a related issue - should a bonus be included in the calculation at all given that bonuses are not guaranteed in the first place.

In the interim, I will offer my clients the option of giving Christmas bonuses the pro rata treatment for cases I file during the first part of 2009.  We'll see if the U.S. Trustee seeks to challenge this interpretation.

Full post as published by The BK Blawg on December 27, 2008 (boomark / email).