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In the Ninth Circuit, your “gross income” includes all gross, without consideration of business expenses.

What's gross income? For a wage earner, it's your pay before taxes and other standard deductions. For a businessman, you might think the number would be similar; his gross business income, less the necessary business expenses it takes to create that income - cost of inventory, for example. That's the way Bankruptcy Form 22, the "means test," was designed. But under a 2008 Ninth Circuit Bankruptcy Appellate Panel decision, In re Wiegand, 386 B.R. 238 (9th Cir. BAP 2008) it's the gross income to the business, without any consideration of the costs or inventory that it takes The difference is that this calculation virtually mandates 5-year Chapter 13 plans for all self-employeds.

Background: All "consumer" debtors (with a narrow exception for injured veterans of the recent wars) must complete a "means test" as part of their bankruptcy petition paperwork, so the court can determine if their income is high enough that they should be required to file under Chapter 13 of the Bankruptcy Code, and make monthly payments for five years toward their unsecured debt. Generally, the means test (Form 22A or 22C) will automatically recognize that if your gross household income is less than the state's average for that size household, you need not file the Chapter 13 (you still can choose to do so, for example, in order to pay a mortgage deficiency over time).

A consumer debtor is defined as one whose debt is "primarily" consumer debt; generally simply as a percentage of total debt. If you're in business, and your credit card debt is mostly to buy business supplies, that is not consumer debt, but if you own a house with a mortgage, the mortgage debt is consumer debt, and it's usually much bigger than all the rest of the debt combined, so most such people are identified as consumer debtors.

The "means test" form, Form 22, provides that self-employed persons should state their average gross monthly income from business during the prior six calendar months, then subtract the business expenses, to identify this part of their "current monthly income." The current monthly income for the household from all sources is then compared to a household median income for that state, established quarterly by the U.S. Census Bureau (available online; look for the U.S. Trustee's office at In Alaska, the current (post March 15, 2010) median for a single person household is $51,940. A debtor whose income is less can file a Chapter 7 case, or can elect to file a short term Chapter 13, but a debtor whose income is more must probably file a five year Chapter 13 case, with specific payment obligations dictated by the form.

Decision: In Wiegand,, the Ninth Circuit Bankruptcy Appellate Panel held that Form 22 was defective, and the debtor's "current monthly income" must include all gross income, including such income from businesses which have business expenses, without regard to any expenses. The debtor in Wiegand was in the trucking business, and showed gross receipts of $6,192 per month, with ordinary and necessary business expenses of $5,175, which reduced his gross income to $1,382, leaving the family below the median in Montana, and entitled to elect a Chapter 7 or three year Chapter 13. The court held that the plain language of the statute (Sec. 1325(b)(2)(B) mandated this result; also, a contrary result would allow debtors to deduct the same expenses twice. The court acknowledged that self-employeds are thereby treated differently than wage-earners, but claims this might he Congress' intent.

Under the Wiegand ruling, self-employed debtors generally will show a much higher "current monthly income" than they actually receive, and will probably be placed in a "mandatory" five-year Chapter 13 plan.

The Wiegand decision recognizes that such debtors may have business expenses, and allows those expenses to be taken out in calculation of "disposable income" that determines the payment that must be made for the benefit of unsecured creditors in the Chapter 13 plan. Exactly how this is done is left to the various bankruptcy courts; the Alaska court has not yet indicated how it is done, and its pattern plan, dictated by local rules, appears to preclude such deductions Clearly the court will recognize the need to deduct expenses, but the process remains murky.

One possible solution to the problem would be for self-employeds to incorporate, then pay themselves a salary. But a debtor would have to plan far in advance, as the means test looks at income for the six month period prior to filing.

At the Law Offices of H. Frank Cahill, in Anchorage, we represent clients throughout Alaska, including, Wasilla, Dillingham, Palmer, Valley, Kenai, Fairbanks, Kodiak, Seward, Soldotna, Homer, Juneau, Wrangell, Petersburg, Bethel, Nome and Sitka; in Fairbanks-Northstar Borough, North Slope Borough, Northwest Arctic Borough and Bristol Bay Borough; and across the Kenai Peninsula. 

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.