There is a saying that always helps me remember the difference between gross and net income: it’s gross to see how much you would be bringing home before taxes. Gross income is what you make before taxes and what you claim as income on your tax returns. Net income is what you actual bring home after taxes and other deductions. If you are a business owner or self employed, your gross income would consist of the entire profit received, and the net income would be what is left over after business expenses.
What does this have to do with bankruptcy? In order to qualify for a Chapter 7 bankruptcy each case is subjected to the Means Test. The Means Test first considers your gross income versus how many people are living in your household. When you consult with a bankruptcy attorney, one of the initial questions should be: “on average, how much do you gross per month?” Knowing this information, your attorney can have a general idea of whether or not you’ll easily pass the Means Test or not. If your gross income automatically fails the Means Test or rather is in violation of the Means Test, there is a possibility that by factoring in certain deductions and expenses you may be able to still qualify for a Chapter 7 bankruptcy. For instance, your gross income for an individual is $4,000 a month, which would rise above the current Means Test. However, each month you pay taxes, a house and car payment, health insurance, term life, and you support your elderly mother or pay child support or alimony. Once these deductions are considered, your income is reconfigured and more than likely you may now pass the Means Test.
When you file for bankruptcy, your average gross income over the last 6 months is a major factor. You must be aware of bonuses, family support, 401(K) or retirement withdrawals, student loans, unemployment, or sale of assets because these are all counted towards your gross income.
In a Chapter 13 bankruptcy, your gross versus net income factors into whether or not you can afford your plan payments or if your disposable monthly income is too high, what percentage should be paid back to unsecured creditors.