Meeting the Bankruptcy Means Test in California
Los Angeles attorneys help you determine if Chapter 7 is the right option
Sometimes situations beyond your control can restrict your earning potential and lead to overwhelming debt. If you find yourself struggling to meet expenses with no realistic hope of increased income in sight, you may want to consider filing for Chapter 7 bankruptcy. This procedure is designed to give debtors a fresh start by erasing most of their debts. However, not everyone is eligible. Debtors must satisfy a complex test that measures their earnings and expenses in comparison with state and local norms. At the Law Offices of Michael Jay Berger, I provide California clients with the critical advice they need to decide whether their financial situations qualify them for Chapter 7.
What is the means test and how is it conducted?
Chapter 7 is intended to benefit people who, due to their relatively low incomes, are likely unable to pay off the massive debts they have incurred. To prove this level of extremity, you must satisfy the bankruptcy means test. Simply put, your average monthly household income must be less than the median income for a household of similar size in California.
But the test is more involved than that, requiring completion of elaborate government forms. One is the Chapter 7 Statement of Your Current Monthly Income for the prior six months, known as the “income look-back period.” This includes your spouse’s income if you are filing a joint bankruptcy.
If you make more than the California median income for your household size, you must fill out another, more intricate form called the Chapter 7 Means Test Calculation. It allows you to adjust your average income downward by itemizing certain expenses, such as housing, transportation, utilities, education, child care, taxes and insurance. You then compare them with IRS local standards for these expenses in California.
Completing the means test calculation gives your total disposable income for the next five years. If is more than $7,700, you must list your total nonpriority unsecured debt and then determine whether your total disposable income is enough to pay 25 percent of that debt. If so, there is a “presumption of abuse” that could block you from filing for Chapter 7. However, you likely will qualify for bankruptcy under Chapter 13, which affords a way to pay off your debts over time.
There is still a chance to qualify for Chapter 7 if you can show special circumstances, namely, additional projected expenses or exigencies you have no reasonable way of avoiding. They may include a serious medical condition or a call to active duty in the Armed Services.
I help my clients to plan ahead to pass the means test whenever possible. Whether you pass the means test or can show special circumstances despite failing it, the court must decide that the totality of the circumstances of your financial situation supports Chapter 7 eligibility.
Exceptions from the means test
In quantifying your income for the test, you may exclude Social Security payments and compensation received as a victim of a war crime, a crime against humanity or terrorism. Also, clients whose debts are primarily non-consumer debts do not need to pass the means test.
You do not need to pass the means test at all if you are a disabled veteran or you are a reservist or member of the National Guard and on active duty for at least 90 days, if at least part of that service was less than 540 days before you filed for bankruptcy.
Contact a certified bankruptcy attorney in Southern California
I am a Certified Specialist in Bankruptcy, a recognition of my experience and expertise in the field. I can help you navigate the complex means test and determine if you qualify for the elimination of your debts under Chapter 7. If you are considering bankruptcy, call the Law Offices of Michael Jay Berger 310-271-6223 or contact us online to schedule a consultation at my Los Angeles office.