Bankruptcy Means Test
If you are struggling with overwhelming debt and you are considering resolving your debts through bankruptcy, one of the most important decisions you’ll have to make is whether to file under Chapter 7 or Chapter 13. If you plan to file for debt forgiveness under Chapter 7 of the Bankruptcy Code, you must first pass the bankruptcy means test, a test that takes into account several different factors, including income, expenses and household size, to determine who is eligible for Chapter 7 bankruptcy. For many debtors, Chapter 7 bankruptcy is a faster form of debt relief, but the process of filing for bankruptcy under Chapter 7 can be complicated and time-consuming and not all debtors qualify. To determine whether you are eligible for a Chapter 7 bankruptcy filing in California, contact our Los Angeles bankruptcy attorneys at ibankruptcyattorneys.com today. Our lawyers are experienced in all matters related to Chapter 7 and Chapter 13 bankruptcy in Los Angeles and throughout California, and we can help you navigate the bankruptcy process to discharge or repay your debts.
Experienced Los Angeles Bankruptcy Means Test Attorneys
One of the first steps in the Chapter 7 bankruptcy process is enlisting the help of a reputable bankruptcy attorney. Generally, your bankruptcy attorney will be the one to fill out the means test form and submit it to the court with the rest of your bankruptcy filing paperwork. You can use an online bankruptcy means test calculator to get a sense of where you stand in terms of your eligibility for Chapter 7 bankruptcy, but it is always a good idea to consult a knowledgeable bankruptcy attorney before you file your bankruptcy petition, to ensure that you are using the right numbers in your calculations and using them properly. Completing the means test and qualifying for Chapter 7 bankruptcy requires the expertise of a good bankruptcy attorney who can review your bankruptcy case and help you reach the best possible outcome. To speak with our qualified bankruptcy attorneys about the means test, or for help deciding which bankruptcy option is best for you, call ibankruptcyattorneys.com as soon as possible to schedule a risk-free consultation.
What is the Bankruptcy Means Test?
In Chapter 7 bankruptcy, also known as “liquidation” bankruptcy, the bankruptcy trustee selected to oversee your case will sell any non-exempt property that is not protected in bankruptcy to pay back your creditors. Because Chapter 7 bankruptcy provides immediate and permanent relief by allowing debtors to wipe out their debts and start fresh with a clean slate within a matter of months, it is widely considered the fastest, easiest and most powerful type of bankruptcy. However, debtors who want to have their debts discharged through Chapter 7 bankruptcy, thereby releasing them from their legal obligation to repay the debts, must meet certain income requirements to be eligible for Chapter 7. When it comes to resolving your debts through Chapter 7 bankruptcy, the main consideration is whether you can pass the bankruptcy means test and qualify for a California Chapter 7 bankruptcy filing in the first place.
How Does the Means Test Work?
The bankruptcy means test measures a debtor’s eligibility for Chapter 7 bankruptcy based on his or her income, expenses, household size and other factors. Congress added the income criteria for Chapter 7 bankruptcy filings in 2005, when it revised the U.S. Bankruptcy Code under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The purpose of the added income requirement was to prevent bankruptcy abuse by restricting Chapter 7 bankruptcy cases to debtors who could not afford to repay any portion of their unsecured debts. Passing the means test is instrumental in qualifying for Chapter 7 bankruptcy, as it means you do not have enough income to put towards paying off your debts. If you do have enough income to repay your debts, you would have to file for bankruptcy under Chapter 13. In making this critical determination, the bankruptcy means test looks at two things – your median income and your disposable income.
Part One – Median Income Test
The first part of the means test compares your average household income to the median income for California, a figure set by the Department of Justice, based on your family or household size. What the Department of Justice does not make clear is who exactly is considered a family or household member. To determine your household size for Chapter 7 bankruptcy, consider how many people actually live in your home and regularly sleep under your roof. This may include your spouse, your children, and anyone else who lives with you and derives meaningful financial support from within the household. As of April 2020, California’s median household income is as follows:
- $60,360 for one earner,
- $79,271 for two people,
- $88,235 for three people,
- $101,315 for four people, and
- an additional $9,000 for each person in excess of four.
The income lookback period for Chapter 7 bankruptcy is six months, which means you will compare your monthly income from the past six months to California’s median income limit. Although the means test considers your household income for the past six months in determining your eligibility for Chapter 7 bankruptcy, there are modifications for recent or upcoming changes to your income. Say, for instance, you had a job for three of the previous six months, but you are now unemployed. The bankruptcy means test will take into account the corresponding reduction in your income. The same goes for any increase in income. For instance, if you recently secured a new job and you are making more money now than you did over the past six months, the boost in income will also be factored into the test.
If your household income is lower than California’s median income, than you most likely qualify for Chapter 7 bankruptcy and you can move forward with your filing without completing the rest of the means test. The government updates the median income limits every so often and the higher the median income level for your state, the easier it is to pass the means test and qualify for Chapter 7 bankruptcy. If, however, your median income is higher than the median household income in California when you take the means test, you will have to go through a full means test calculation to show that you have little or no disposable income left at the end of the month to pay back your debts. This brings us to part two of the means test.
Part Two – Disposable Income Test
The second portion of the means test has to do with your disposable income, which is the amount of income you have to save or spend as you see fit after deducting the cost of rent, clothing, medical bills, groceries and other “allowable expenses.” For this part of the test, you will have to gather documentation about your expenses from the past six months and subtract those expenses from your monthly income.
Most deductions for allowable living expenses are based on national and local standards set by the IRS. For a single person with one car, the national standard for bankruptcy cases filed on or after May 1, 2020 is $385 for food, $45 for housekeeping supplies, $85 for apparel and services, $43 for personal care products and services, $157 for miscellaneous expenses and $521 for vehicle ownership costs. For a single person in Los Angeles County with a mortgage and a car, the local housing and utilities standards allow $2,335 to be deducted for housing expenses and the local transportation expense standards allow $254 to be deducted for vehicle operating costs. If you deduct your allowable expenses and your disposable income is below the income limit, you may still be eligible for Chapter 7 bankruptcy, which will forgive most of your unsecured debts, including credit card debt and medical bills. If your disposable income is higher than the income limit, do you not qualify for Chapter 7 bankruptcy.
The disposable income portion of the bankruptcy means test is meant to determine how much, if any, disposable income you have available to put towards paying your unsecured creditors in a Chapter 13 repayment plan. With that in mind, it is important to be precise and thorough in laying out your expenses during this stage of the means test, as any errors or omissions could result in your case being thrown out. That is one of the main reasons we recommend working with a bankruptcy attorney who can ensure that your expenses are properly documented and help your bankruptcy case proceed as smoothly as possible.
Why is the Means Test Important?
Along with consulting an experienced bankruptcy attorney, taking the means test is one of the earliest and most important steps in filing for bankruptcy in Los Angeles. That being said, the bankruptcy means test is only for debtors who have primarily consumer debts, such as credit card debt or medical bills, that can be discharged through Chapter 7 bankruptcy. The bankruptcy means test is important because it is the final word on whether you are eligible for Chapter 7 bankruptcy or restricted to a Chapter 13 filing. If you pass the means test, that means you have the go-ahead to file for Chapter 7 bankruptcy. While the purpose of the means test is to limit the number of debtors who qualify to have their debts forgiven through a Chapter 7 bankruptcy filing, most people are able to pass the test relatively easily. In fact, only a small percentage of debtors who take the means test do not pass it during the median income stage.
What if I am Not Eligible?
Keep in mind that just because you earn more than the median income in California does not mean you are not eligible for a Chapter 7 bankruptcy filing. In many situations, a good bankruptcy attorney can help a debtor who is over the median income complete the bankruptcy means test and file Chapter 7 bankruptcy. If you don’t pass the bankruptcy means test, because either your household income or disposable income is too high, there is no appeals process. However, if you can afford to wait another six months and you think your circumstances will change enough during that time that you will meet the threshold for Chapter 7 debt forgiveness, you can choose to take the means test again. If you don’t qualify for Chapter 7 bankruptcy or you want to retain certain assets, such as a house or vehicle, you may instead choose Chapter 13 bankruptcy, which gives you the opportunity to retain your assets and get caught up on your debts, such as late mortgage payments, back taxes and overdue loans. In Chapter 13 bankruptcy, which requires you to pay back your debts over three to five years, the outcome of the bankruptcy means test will come into play when working out the terms of your debt repayment plan.
Contact a Skilled Los Angeles Bankruptcy Attorney for Help
Filing for bankruptcy can be expensive and confusing even in the simplest of cases and completing the bankruptcy means test can be an intimidating process. It can be difficult even to know whether bankruptcy is right for you, and if it is, which bankruptcy chapter best suits your needs. The reality is that, for many debtors, having their debts discharged through Chapter 7 bankruptcy is the first step in rebuilding their financial life. If you are considering bankruptcy as a means of resolving your debts, speaking with a knowledgeable bankruptcy attorney can help you determine which debt-relief option is the best choice for you based on your circumstances and your financial goals. An attorney with experience handling Los Angeles bankruptcy cases can make sure you are using the correct figures when determining whether you meet the income requirements for Chapter 7 bankruptcy, as these figures are updated by the government once or twice a year, and can ensure that you are getting all of the deductions you are entitled to when calculating your disposable income. For more information about taking the bankruptcy means test in California, contact our reputable Los Angeles bankruptcy attorneys at ibankruptcyattorneys.com today.