Bankruptcy Means Test
In order to file for Chapter 7 bankruptcy in Los Angeles, you must meet certain income requirements established by the state of California, which is where the bankruptcy means test comes into play. If you are considering declaring Chapter 7 bankruptcy as a means of eliminating your debt, you may have questions about the bankruptcy means test and how it applies to your specific situation, or you may be unsure about who counts as a member of your household and how your household income is calculated for the purposes of the means test. Our Los Angeles bankruptcy attorneys at Resnik Hayes Moradi LLP are experienced in all areas of bankruptcy and it is our primary goal to take the stress typically associated with filing for bankruptcy off your shoulders. We can help you determine whether Chapter 7 bankruptcy is right for you, and if it is, whether you pass the bankruptcy means test to qualify, as well as competently answer any other questions you may have along the way. Contact our firm today to discuss your bankruptcy case with our team of seasoned attorneys.
Reputable Los Angeles Bankruptcy Attorneys
Passing the bankruptcy means test is an important component of a Chapter 7 bankruptcy filing, but it isn’t always the be-all and end-all of qualifying for Chapter 7 bankruptcy. In many cases, a skilled bankruptcy attorney with extensive knowledge of Los Angeles bankruptcy law and the income requirements in California can help individuals whose income exceeds the median income for their household size complete the bankruptcy means test and still file for Chapter 7 liquidation bankruptcy. At every stage of the bankruptcy process, having an experienced attorney on your side can help you feel more confident in your decisions and make the overall process considerably smoother, easier and less stressful. At Resnik Hayes Moradi LLP, we understand how difficult it can be to make the decision about filing for bankruptcy, which is why we offer prospective clients a free initial consultation with an experienced Los Angeles bankruptcy attorney. Contact our firm at your earliest convenience to find out how we can help.
What is the Bankruptcy Means Test?
The bankruptcy means test is used to determine eligibility for a Chapter 7 bankruptcy filing in Los Angeles. Generally speaking, a person is eligible for Chapter 7 liquidation bankruptcy, in which all or most unsecured debts are discharged and no longer require repayment, only if his or her income is low enough. Individuals with an income that is above the state of California’s median income limit for their household size will have to pass the bankruptcy means test in order to qualify for Chapter 7 bankruptcy. The bankruptcy means test uses your income and expense information to determine how much money you have that you could potentially use to repay your creditors under Chapter 13 reorganization bankruptcy. If you don’t pass the means test, meaning your income is higher than the income limit, you are not eligible for Chapter 7 bankruptcy and you are left with a Chapter 13 repayment plan as your only bankruptcy option.
Bankruptcy Means Test Requirements
The means test uses a mathematical formula to determine whether you qualify for Chapter 7 bankruptcy, or as the law puts it, whether filing for bankruptcy under Chapter 7 would be an “abuse” of the bankruptcy system. The Los Angeles bankruptcy means test is technically a two-part test and in order to qualify for Chapter 7 bankruptcy, you must pass one of the parts.
Bankruptcy Means Test Part One – Median Income
Part one of the bankruptcy means test compares your average household income for the previous six months to the median income for the state of California based on a household of your size. If your income falls below the median income, the law presumes that you pass the means test and you are automatically eligible to file a Chapter 7 liquidation bankruptcy to have your unsecured debts discharged. If your income exceeds the median income in California, that doesn’t necessarily mean you are barred from filing for bankruptcy under Chapter 7. However, in this case, you will be required to pass the second part of the bankruptcy means test.
Bankruptcy Means Test Part Two – Disposable Income
Part two of the bankruptcy means test takes into consideration your household income and expenses, in order to determine whether you are able to pay back all or a portion of your unsecured debt under Chapter 13 reorganization bankruptcy, which establishes a plan for your debts to be repaid over the course of three to five years. In addition to standard deduction allowances based on the number of people in your household and the cost of living in Los Angeles, you may also be able to deduct your mortgage, car payments and other actual expenses.
- If based on your income and allowed expenses, you are able to pay at least $12,475 ($207.92 per month for five years), you are not eligible for Chapter 7 bankruptcy.
- If you can pay at least $7,475 ($124.58 per month for five years), and that reflects at least 25% of the unsecured debts you owe to your creditors, you are not eligible for Chapter 7 bankruptcy.
- If, however, the amount of your disposable income prevents you from paying at least $7,475, you are eligible to file for Chapter 7 liquidation bankruptcy.
Median Income Requirements in California
If you are considering filing for Chapter 7 bankruptcy in Los Angeles, it is important that you understand the median income requirements for the state of California and how to calculate your average household income for the purposes of the bankruptcy means test. Your annual household income can be calculated by averaging your monthly income during the six months prior to your bankruptcy filing and then multiplying that number by 12 to get your average annual income. As of 2019, the median income limits used to determine whether debtors qualify for Chapter 7 bankruptcy in California are as follows:
- One-person household – $57,962
- Two-person household – $77,167
- Three-person household – $84,003
- Four-person household – $96,813
- Five-person household – $105,813
- Six-person household – $114,813
- Seven-person household – $123,813
- Eight-person household – $132,813
- Nine-person household – $141,813
- Ten-person household – $150,813
- Each additional person – add $9,000
If your annual income is more than the median income in California based on the size of your household, you will be required to complete the second portion of the bankruptcy means test, which involves calculating your disposable income and expenses. If your annual income is more than the income limit for your household size and your income has decreased over the previous six months, it might be in your best interest to wait a month or two until your income is below the median level to file for bankruptcy, so you don’t have to complete the means test.
Passing the Bankruptcy Means Test
Simply put, in order to pass the bankruptcy means test in Los Angeles and qualify for Chapter 7 bankruptcy, you will need to show that you don’t have the income necessary to pay back your creditors. However, correctly calculating your disposable income can get complicated, which is why it is a good idea to consult a bankruptcy attorney to help you figure out whether you are getting all of the deductions you are entitled to under the law. Keep in mind that the government also periodically updates the income limits used for the bankruptcy means test, so you should contact a Los Angeles bankruptcy lawyer to ensure that the figures you are using to determine your eligibility for Chapter 7 bankruptcy are accurate. As these income limits continue to increase, more and more debtors in Los Angeles are able to qualify for a Chapter 7 bankruptcy filing.
Bankruptcy Means Test Exemptions
There are certain factors that may exempt you from the bankruptcy means test in Los Angeles. For instance, if your primary reason for filing for bankruptcy is due to business debts, meaning more than 50% of your debt is business-related, the bankruptcy means test does not apply to you and you can file for Chapter 7 bankruptcy regardless of your income. That is because the bankruptcy means test only applies to consumer debts, or personal debts, which are debts acquired by an individual for personal, family or household purposes.
Benefits of Chapter 7 Bankruptcy
The most common type of bankruptcy filing in Los Angeles is Chapter 7, which allows debtors to relieve themselves of overwhelming debt by having some or all of the unsecured debts they owe discharged, or eliminated, including debts from personal loans, medical bills, and credit card bills. When you file for Chapter 7 bankruptcy in Los Angeles, any assets of yours that aren’t exempt are sold, or liquidated, in order to pay back your creditors. Once your debts are discharged, you are no longer responsible for repaying the debts and creditors are no longer permitted to take collection actions against you to seek payment for the debts. Chapter 7 bankruptcy is considered the fastest and easiest type of bankruptcy filing, but not all debts are dischargeable in Chapter 7 bankruptcy, and not all debtors qualify for a bankruptcy filing under Chapter 7, which is why we always recommend hiring a knowledgeable bankruptcy attorney when seeking relief through bankruptcy in Los Angeles.
How a Bankruptcy Attorney Can Help
Passing the bankruptcy means test is the first step towards filing Chapter 7 bankruptcy in Los Angeles. However, just because you’ve passed the means test and are therefore eligible to file Chapter 7 bankruptcy, doesn’t necessarily mean you should. There are some great advantages to Chapter 7 bankruptcy – when you file for bankruptcy under Chapter 7, all or most of your unsecured debts will be discharged, meaning you are no longer legally obligated to repay them – but there are also some trade-offs that you should be aware of when considering a Chapter 7 bankruptcy filing. For instance, you may not be able to keep your home in Chapter 7 bankruptcy, unless you don’t have much equity in your home, you can exempt your home equity under the homestead exemption, or you can make up for any past-due payments and stay current on the mortgage. That being said, most people are able to protect all of their property in Chapter 7 bankruptcy, thanks to California’s bankruptcy exemptions.
For many people struggling with debilitating debt, filing for bankruptcy is the best way to take charge of their debt and safeguard their financial future, but before making any final decisions about bankruptcy, you should consult an attorney with experience handling a wide variety of bankruptcy cases in Los Angeles and the surrounding area. At Resnik Hayes Moradi LLP, our seasoned bankruptcy attorneys have represented thousands of clients in bankruptcy cases in Los Angeles, Orange, San Bernardino, San Fernando Valley and Riverside Counties, and each of our partners is a board-certified bankruptcy specialist, which means they have demonstrated the highest levels of knowledge and experience in bankruptcy law. Together, our bankruptcy attorneys at Resnik Hayes Moradi LLP bring more than 50 years of legal expertise to the table and our extensive skill and knowledge in the areas of bankruptcy and debt relief can be of great use to you when deciding whether to file for bankruptcy.
Consult Our Los Angeles Bankruptcy Attorneys Today
Deciding to file for bankruptcy is rarely an easy decision, but once you have a clear understanding of what Chapter 7 bankruptcy entails and where you fall in terms of income and the bankruptcy means test, you can make an educated decision about your financial situation and take the steps necessary to pursue a debt-free future. At Resnik Hayes Moradi LLP, our Los Angeles bankruptcy attorneys have experience representing clients in all types of bankruptcy cases and we will ensure that you understand all of the options available to you before making a decision about bankruptcy. With our legal team on your side, you can finally take control of your mounting debt and achieve the financial freedom you have always dreamed of. Contact our reputable Los Angeles bankruptcy attorneys at Resnik Hayes Moradi LLP today to schedule a free initial bankruptcy consultation.
“The bankruptcy attorneys at Resnik Hayes Moradi LLP provided us the peace of mind I so desperately needed. I was not sure what to do and I felt like I was at the end of my rope. They were there the entire step of the way and gave me the necessary information I needed to make the right choice for my family.” – Dave B.