If you're struggling with debt, you should consider declaring bankruptcy for financial relief. One of the most important decisions you will need to make is whether to declare bankruptcy under Chapter 13 or Chapter 7. If you intend to petition for debt relief under Chapter 7, you should first meet the requirements of the bankruptcy means test. This test determines who qualifies for Chapter 7 bankruptcy by looking at different elements, such as your expenses, income, and the size of your family. This article goes into detail on what is considered a bankruptcy means test.
Understanding a Bankruptcy Means Test
In a Chapter 7 bankruptcy, commonly referred to as a "liquidation," the trustee appointed to manage your case can dispose of any non-exempt assets to repay your creditors. Chapter 7 bankruptcy is often considered the easiest, fastest, and most effective type of bankruptcy since it offers debtors instant and long-term relief by enabling them to eliminate their obligations and start over with a fresh start in a few months.
However, to be qualified for Chapter 7, debtors should meet some income requirements. By filing for Chapter 7, borrowers can have their obligations discharged, relieving them of the duty to pay back their financial obligations. The main factor in deciding whether you are eligible for bankruptcy and initially being eligible to file for a Chapter 7 petition depends on whether the income you currently generate is, in Congress’ eyes, enough to pay back at least a portion of your debt.
How a Bankruptcy Means Test Works
A bankruptcy means test determines a person's eligibility to file for Chapter 7 bankruptcy by considering their household size, expenses, income, and other elements. Congress updated the U.S. Bankruptcy Code in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), by including the income requirements for Chapter 7 bankruptcy claims.
The objective of the additional income condition was to stop people from abusing bankruptcy by limiting Chapter 7 cases to individuals who couldn't pay back any of their unsecured obligations. If you pass the means test, it implies that you don't make enough money to cover your obligations, which is a requirement for Chapter 7 bankruptcy.
If you have enough money to pay off at least a certain portion of your financial obligations, you will need to apply for Chapter 13 bankruptcy. The bankruptcy means test considers two factors while making this essential decision, that is your disposable income and median income.
Median Income Test
The first element of the bankruptcy means test evaluates the debtor's average household earnings to the California median income, which is determined by the Department of Justice depending on your household or family size. The Department of Justice doesn't specify who constitutes a household or family member.
If you're filing for bankruptcy under Chapter 7, the number of people who reside in your household is based on how many individuals live and sleep in the property daily. This can include your children, spouse, and any other person who stays with you and depends on you for substantial financial support.
The following is the California median household incomes on the date this blog was drafted (June 21, 2024):
- $74,819 for a single earner
- $96,600 for 2 individuals
- $109,458 for a family of three
- $1128,533 for a family of four
- An extra $9,900 for every individual over four persons
Since the income lookback window for a Chapter 7 filing is 6 months, this implies that you can evaluate your monthly earnings from the preceding 6 months to the state's median income cap. Although the bankruptcy means test evaluates your household income for the previous six months when calculating whether you're eligible to file for bankruptcy under Chapter 7, there are exceptions for prospective or recent income changes.
For example, if you were employed for three out of the previous 6 months but are currently unemployed, the resulting decrease in your earnings will be considered in the means test. The same principle also applies to any increment in income. For example, if you just got a new position and are now earning more than you were in the previous six months, this increase in income would also be taken into account when grading your means test.
To file for Chapter 7 bankruptcy, your California household income should be at or below the state's median income level. If that's the case, you are likely eligible for Chapter 7 and could skip the rest of the bankruptcy means test. The federal government periodically revises the median income limitations, and if your jurisdiction has a higher median level of income, you will have an easier time passing the bankruptcy means test and be eligible for bankruptcy under Chapter 7.
However, if you decide to carry out the means test and your median income exceeds the California median household income level, you'll need to complete a full bankruptcy means test assessment to demonstrate that you would have little to no disposable income left over at the end of a given month to pay off your obligations. This leads us to the second part of the bankruptcy means test.
Disposable Income Test
The second part of the bankruptcy means test focuses on disposable income. This refers to the amount left over after paying for your groceries, rent, medical expenses, clothing, and other "allowable expenditures" that you can spend or save as much as you see appropriate. You could need to track down receipts covering the last six months' worth of spending and remove that amount from your regular monthly income for this section of the means test.
Most allowable living expense deductions are determined based on federal, state, and local requirements established by the IRS. The nationwide norm for bankruptcy cases submitted on or after May 1, 2020, includes $521 for vehicle ownership expenditures, $385 for food costs, $45 for household supplies, $85 for services and apparel, $43 for personal care merchandise and services, and $157 for miscellaneous costs.
The local requirements for utility and housing allow deductions worth $2,335 for housing expenses for one individual who has a car loan or mortgage, and the local transportation expenditure requirements allow a deduction worth $254 for the cost of operating a vehicle.
If your disposable income after necessary deductions is less than the bankruptcy income limit, then you could be entitled to file for bankruptcy under Chapter 7 and have most of your unsecured financial obligations, such as medical bills and credit card debt, discharged.
You are ineligible for Chapter 7 if your disposable income exceeds the income limit. This section of the means test is designed to determine the amount of disposable income a debtor has available to pay unsecured lenders in Chapter 13 bankruptcy's repayment plan.
It's crucial to be accurate and detailed when outlining your costs at this phase of the means test because any mistakes or omissions could lead to the rejection of your claim. One of the key reasons to consult with a bankruptcy lawyer is to make sure all your costs are accurately documented and your bankruptcy case proceeds with as little disruption as possible.
Importance of the Means Test
Undertaking the bankruptcy means test, as well as speaking with an expert bankruptcy attorney, is one of the first and most crucial steps in declaring bankruptcy. However, the means test is only applicable to borrowers who have a majority of consumer debts that are dischargeable under Chapter 7 bankruptcy, like medical costs or credit card debt.
The means test is crucial because it determines whether you can apply for Chapter 7 bankruptcy or have to file a Chapter 13 bankruptcy instead. If you satisfy the means test requirements, you can file for bankruptcy under Chapter 7.
While the means test's objective is to restrict the number of borrowers who are eligible for debt relief through the filing of a Chapter 7 bankruptcy petition, most individuals can get through it pretty easily. Only a small number of individuals who submit to the means test fail it at the median income level.
What Happens If I Don't Qualify?
Having an income higher than the state's average does not necessarily mean that you are ineligible to file for bankruptcy under Chapter 7. The income limit is set at the state's median income. A competent bankruptcy lawyer can help a borrower who earns more than the median income pass the means test and declare Chapter 7 bankruptcy.
There isn't an appeal process if you fail the bankruptcy means test since your disposable income or family income is in excess. However, you may opt to retake the means test if you can wait another 6 months and believe that during that period your situation will have changed enough for you to qualify for Chapter 7 bankruptcy.
If you are not eligible for Chapter 7 or want to keep certain property, like your home or automobile, you could instead opt for Chapter 13, which allows you to keep your assets while catching up on your financial obligations, like late payments on mortgages, overdue loans, or back taxes.
The results of the bankruptcy mean test will be taken into consideration while formulating the conditions of your debt repayment plan under Chapter 13 bankruptcy, which mandates that you repay your obligations over between three and five years.
Is It Possible To Still Plan For A Chapter 7 Bankruptcy?
The bankruptcy court can award Chapter 7 relief if they believe it necessary if you failed the bankruptcy means test and still intend to seek it. Some of the justifications for doing this include:
- You recently lost your job
- You have been out of work for a long time and might no longer be qualified to receive unemployment benefits
- Ongoing/outstanding medical bills
The Court rarely allows the borrower to bypass the bankruptcy means tests. However, if you're able to show proof of these exceptional situations, they could be willing to do so and permit you to continue filing for bankruptcy under Chapter 7.
How a Skilled Bankruptcy Lawyer Can Assist With the Bankruptcy Means Test
When filing for Chapter 7 bankruptcy, one of the first things you'll need to do is seek the assistance of a competent bankruptcy attorney. In most cases, your bankruptcy lawyer is the one who will be responsible for filling out the bankruptcy means test document and submitting it to the courts along with every other piece of documentation that is required to file for bankruptcy.
If you want to get a glimpse of where you stand when it comes to your admissibility for filing bankruptcy, you could use the means test calculator that is available online. However, it's always recommended to speak with an experienced bankruptcy lawyer before you submit your bankruptcy claim. This will ensure that you're using the correct figures in the calculations and that you are applying them in the right way.
To pass the means test and be eligible for bankruptcy under Chapter 7, you will need the assistance of an experienced bankruptcy attorney. The legal professional will examine your case and work with you to achieve the most favorable result possible. You can learn more about the bankruptcy means test by consulting with an experienced attorney who specializes in bankruptcy law. They can also assist you in determining which of the available bankruptcy options is the most suitable for your unique circumstances.
Additionally, a lawyer with expertise in handling bankruptcy cases can make sure you're using the right information when assessing whether you meet the financial requirements for Chapter 7 bankruptcy. This is because such information gets revised by the authorities once or twice annually. They're also able to check that you are receiving all the deductions you're allowed to take when determining your disposable income.
Find a Bankruptcy Attorney Near Me
Declaring bankruptcy can be stressful and costly, even in the simplest of circumstances. Part of this process is figuring out how much money you owe to creditors. For many people who are behind on their payments, the first step in reestablishing financial stability is to have their obligations erased through the Chapter 7 bankruptcy process.
If you’re considering filing for bankruptcy to end your financial obligations, you can consult with the Sacramento Bankruptcy Lawyer. Our experienced bankruptcy attorneys can help you determine the best debt-relief strategy for your situation and financial goals. Call us today at 916-800-7690 for help with the California bankruptcy means test.
