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What is Monthly Net Income and How Will It Affect My Bankruptcy Case?

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In a Nutshell

Net income is your income after deductions are taken out. Simply put, net income is your take-home pay, what you deposit into your bank account on payday. Generally, a paycheck stub will show all deductions from your income, including taxes, insurance, income tax, and FICA and other deductions that may come out your gross income, such as health insurance. The total amount left over after these deductions is the net income.

Written by Attorney Karra Kingston
Updated July 22, 2020

To file Chapter 7 bankruptcy, the bankruptcy court wants to see that you need the protections of the bankruptcy process because you don’t have any amount of money left over to pay back your credit cards or unsecured loans. Congress enacted a means test to ensure individuals who could otherwise pay back their debts wouldn’t use the bankruptcy process to not pay back their creditors. To determine eligibility under the means test, the bankruptcy court considers a filer’s income sources, hourly wages, financial statements, pay stubs, and expenses. This article will explain what monthly net income is, how to determine it, and how it will be used to see if you qualify for bankruptcy. 

What is Net Income?

Gross income is a person’s total wages before any deductions are taken out. Gross pay includes wages, bonuses, salary, and tips. Most people can find their gross monthly income by calculating their total pay each week before any deductions. 

Net income, on the other hand, is a person’s income after deductions are taken out. Simply put, net income is a person’s take-home pay. Net income is usually the amount a person deposits into their bank account once they receive their pay stub. Generally, a paycheck will show taxes, insurance, income tax, and FICA deductions being subtracted from the person’s wages the number left over is a person’s net income. Other deductions that may come out of a paycheck are medical, dental, and retirement deductions. The total amount left over after these deductions is the net income. 

Annual Net Income

Annual net income is the monthly net income you receive over the year. Generally, people who are paid a salary receive a W-2 at the end of the year from their employer reflecting their annual gross income and annual net income. The W-2 provides a snapshot of a person’s annual net income and deductions to determine a person’s taxable income with the IRS.

The easiest way to think of your monthly net income or your annual net income is to look at what you have leftover to pay your monthly or yearly expenses. Using your annual net income is a good way to start setting financial goals for yourself. Determining what your annual net income is can help you decide how much money you can afford to put away in a savings account after your monthly expenses. This is a great way to start a monthly budget plan. Setting money aside in a bank account for yourself can be a step in the right direction towards rebuilding your credit score. 

What if I am An Independent Contractor?

Independent contractors do not have deductions withheld from their pay. Instead, independent contractors must set aside taxes and file quarterly tax returns with the IRS. Independent contractors do not receive paystubs and no automatic deductions taken out. Self-employed individuals and independent contractors don’t receive wages because they don’t have an employer-employee relationship. Instead, independent contractors must pay self-employment taxes. Self-employment taxes are taxes that are paid to the IRS that would have been paid if the independent contractor had a traditional job. 

Many independent contractors and self-employed individuals do a profit and loss statement at the end of the year to determine what their annual net income is. To file bankruptcy, the court typically requires independent contractors and business owners to provide a 6-month profit and loss statement. A profit and loss is a financial statement that summarizes a business owner’s gross income and expenses (ie. cost of goods sold, travel expenses, etc.) during a specific pay period. Generally, an accountant can help draw this up.  

What About Social Security or Other Government Benefits?

Most government benefits do not have taxes withheld. If you are receiving social security benefits, you may find a deduction for medicare being taken out so the total amount deposited into your account may be less than the total benefit amount you are awarded. 

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How Does Net Income Affect A Bankruptcy?

In a bankruptcy case, net income is determined two ways. The first way is by looking at Schedule I. Schedule I on the bankruptcy forms asks filer’s to list their income and deductions. Schedule I is based strictly on pay stubs and income statements. To complete Schedule I, filers need their paystubs to calculate their gross monthly income. They will also need to determine what deductions are taken out of their paystubs. 

People who are self-employed or are employed as an independent contractor will need to input the income from their profit and loss statement. They will also be required to include expenses for quarterly tax payments.

Individuals filling out Schedule I should include pay from all income sources, such as child support, family support, rental income, and gross pay. After completing Schedule I, filers will need to complete schedule J which will ask for monthly expenses and deductions. Schedule I will take your total income and put it against your monthly expenses on Schedule J to see if there is any money left over to pay back creditors. 

The Bankruptcy Means Test

To qualify for bankruptcy individuals must pass a means test. The means test is the second way net pay is calculated. The means test is a two-part test. The first part is a calculation based on the filer’s gross income. To see if one qualifies under the means test the individual compares their household income to the median household income of the same size in the state they live in. If the person is under the household median income they pass the means test. If, however, they are over they will need to move to the second part of the means test. 

The second part of the means test takes into account an individual’s income and expenses to see If there is any disposable income left over. To calculate the second part of the means test filers take out their monthly deductions. Some of the most common deductions are for child support, health care, social security, and FICA. 

To calculate expenses that can be deducted on the second part of the means test, the court bases the monthly net income on IRS standards for the cost of living, not actual expenses. If the filer has other higher monthly expenses than what is allowed under the IRS standard expenses they will have to provide documentation which shows they pay more than what the IRS allows. 

To qualify for a Chapter 7, filers need to be under the median gross income or have very little disposable income remaining. If you pass the second part of the means test you can file a Chapter 7. If, however, you do not pass the means test you will have to file a Chapter 13 instead

A Chapter 13 bankruptcy is for high wage earners. In a Chapter 13 bankruptcy, individuals pay back their creditors over a 3-5 year repayment plan. Individuals can file Chapter 13 if they are over the median household income and have enough disposable income to pay back their creditors over the term of the repayment plan. 

The means test can be very confusing for people who have never seen it before. It is easily one of the most confusing topics to grasp when filing bankruptcy. Upsolve provides free tools to help people calculate the means test


Calculating monthly net income or annual net income may seem overwhelming. To keep it simple, it is just the take-home pay you receive every week after payroll taxes. If you are worried that you won’t qualify under the means test, don’t worry. Many low wage earners qualify even without having to calculate the second portion of the means test which requires going through IRS standard deductions. 

Individuals who are really worried about whether or not they will pass the means test and qualify for a Chapter 7 bankruptcy should speak with a bankruptcy lawyer. A bankruptcy lawyer can go through your annual salary, annual net income, annual gross income, and income taxes to help you calculate your gross monthly income and monthly net income to ensure that you qualify for a Chapter 7 bankruptcy. 

Written By:

Attorney Karra Kingston


Ms. Kingston began her career as a bankruptcy attorney. She has appeared in front of many federal court judges and has helped numerous debtors obtain a fresh start. Ms. Kingston understands the complex federal rules for discharging debt. While working as a bankruptcy attorney, Ms... read more about Attorney Karra Kingston

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