Passing the Bankruptcy Means Test in California
How to establish qualification for Chapter 7 Bankruptcy
Bankruptcy is a powerful tool for debtors who need relief from creditors and a fresh start. But if the Chapter 7 bankruptcy remedy is abused, it can impose undeserved hardship on creditors. To strike a fair balance, the U.S. Bankruptcy Code requires Chapter 7 filers to pass a means test, demonstrating a legitimate need for relief. For some debtors, passing the test is complicated. At Marlin Branstetter Attorney at Law in Anaheim, I provide detailed guidance in establishing your eligibility for Chapter 7.
What is the bankruptcy means test?
The means test is a detailed assessment of a debtors income, expenses and allowable deductions that determines whether the debtor is permitted to file Chapter 7 bankruptcy.
The calculation for a bankruptcy means test
There are two stages of the means test. The first step is to determine whether your monthly household income is less than the state’s median income for a household your size. If it is, you pass the test.
If your income is higher than the state median amount, you can still pass the means test by presenting a detailed calculation of income, allowable deductions and expenses. This requires filling out a nine-page form that delves into your finances to assess whether you have sufficient disposable income to partially repay your debt.
Information needed to complete a bankruptcy means test
The means test calculation is comprehensive, requiring that you assemble extensive documentation. You must tally your income from all sources, with exceptions for disability and social security income. From that total, you are allowed certain deductions, which include:
- Mandatory employment deductions, such as union dues, retirement plans, and work uniforms.
- Income taxes
- Childcare expenses
- Term life insurance premiums
- Health and disability insurance premiums
- Secured loan payments (such as mortgage and auto loans)
- Alimony and child support payments
- Charitable contributions
You can also deduct certain other expenses. Maximum amounts in the following categories are set by state or national standards:
- Housekeeping supplies
- Clothing
- Food
- Personal care services and products
- Housing and utilities
- Transportation
- Out-of-pocket healthcare costs
The amount left after subtracting allowable deductions is your disposable income. If this amount is insufficient for you to partially repay your creditors under a Chapter 13 plan, you will qualify for Chapter 7. This makes the means test extremely important, which is yet another reason to retain an attorney who is willing to take the time to properly assess your circumstances.
Will passing the means test qualify you for Chapter 7 bankruptcy?
If you pass the means test, you can file for Chapter 7 bankruptcy. However, this is not the definitive word on whether Chapter 7 is the best route for someone in your circumstances. You should consult an Anaheim bankruptcy lawyer who is willing to give a personalized analysis of your financial situation.
What happens if you don’t pass the Chapter 7 means test?
If you don’t pass the means test, you can still seek bankruptcy relief through Chapter 13, which requires making monthly debt repayments over a three- or five-year period. The process takes longer, but there are advantages, especially for homeowners who want to save their house from foreclosure.
Contact an Anaheim bankruptcy lawyer for personalized means test assistance
Marlin Branstetter Attorney at Law in Anaheim helps clients prepare for the Chapter 7 bankruptcy means test. To schedule a time to speak with me, call 714-276-8589 or contact me online.
