When unexpected events occur, they may affect your finances negatively. As a result, you may need to file for bankruptcy to help repay your creditors and to avoid any legal implications of defaulted debts. While several types of bankruptcy claims are available, the most suitable one to consider is Chapter 7 because of its fast processing and easier repayment plan.

To qualify for Chapter 7 bankruptcy, you must meet the qualifications, including passing your means test. The means test aims to ascertain that you currently have fewer funds than the average person by reviewing your household income over six months and checking your disposable income amounts.

When preparing to undergo the means test to qualify for Chapter 7 bankruptcy, you must acquire and provide multiple financial documents in court. The presiding judge is keen on the quality of your information, so you must ensure accuracy. With a bankruptcy attorney’s help, you do not have to worry about meeting the court requirements and filing the necessary documents on time. Your legal team will also provide advice on additional helpful tips for preparing for the means test.

What Filing for Bankruptcy Means

You may hit financial hurdles when you cannot access a steady income like you previously did. The effects may also affect your ability to repay your creditors, leaving you at risk of facing legal proceedings to compel you to repay.

You can avoid the hardships of a change in financial access by filing for bankruptcy in court. The move is a formal declaration of your inability to service your creditors, giving the court power to take over your assets and resources to intervene in the repayment process.

Once you file for bankruptcy, the court will appoint a team of trustees to oversee your estate. Their role is to liquidate your unprotected assets and use the proceeds to repay your creditors. After the court hands over access to your assets to the trustees, you cannot direct them on how to sell them for liquidation.

Price points may vary, and your property may sell at a loss, which may be detrimental to you. Despite this, the court’s primary goal is to liquidate and obtain rough money to pay off your creditors, regardless of the selling price for your unprotected assets.

Generally, filing for bankruptcy is advantageous because the court can sometimes order debt forgiveness, mainly if your unprotected assets cannot produce the required amount for debt repayment.

Based on this, filing for bankruptcy can be a protective measure for your household, as it prevents unnecessary lawsuits and criminal sanctions from preventing you from repaying the debt if you genuinely lack the funds to do so. Since bankruptcy courts are aware of the potential abuse of filing for bankruptcy, they introduced the means test to ensure that only parties with legitimate financial needs benefit from the system. It is now a mandatory step for anyone seeking to file Chapter 7 bankruptcy. 

Understanding Chapter 7 Bankruptcy and the Means Test

Chapter 7 and Chapter 13 bankruptcy claims are the most commonly filed in court, as they relate to your direct assets at a personal and business level. Chapter 7 is more widely sought-after because it offers a faster solution. Under Chapter 7, the court can completely erase your debt obligations if they can ascertain that your earnings and expenditures are below the median.

In contrast, Chapter 13 bankruptcy applies to people with sufficient means to repay their debts but who can only do so over an extended period. You, therefore, do not receive debt forgiveness under Chapter 13, but only an allowance to reorganize debt as they repay the owed amounts.

Based on the differences, Chapter 7 bankruptcy is a better option, but you must pass the means test to persuade the judge of your difficult financial position. Your bankruptcy attorney will walk you through the importance of the test and how to ensure you pass it to proceed with the subsequent debt repayment stages.

The Importance of the Bankruptcy Means Test

Although the bankruptcy means test may be a restriction for some parties, it is a crucial step toward filing for Chapter 7 bankruptcy. The courts are keen to enforce it because it formally establishes your eligibility as a valid party filing Chapter 7 bankruptcy.

By eliminating a section of persons in debt who do not present legitimate claims, the court also intends to provide the most assistance possible to you by appointing trustees to liquidate your assets. The test, therefore, determines whether your income is sufficient to pay off your debt.

If the findings reveal that you have a lower source of income than the median, you will have passed the test and qualified for Chapter 7 bankruptcy. A determination indicating that you have sufficient funds to repay your creditors results in a redirect to Chapter 13 bankruptcy, and you will need to reorganize your debt.

However, having sufficient money in your account for debt repayment does not automatically qualify you for Chapter 13 bankruptcy instead of Chapter 7. The court will still make an overall assessment of your expenditures and determine your net income.

Based on this, you should not attempt to modify your payment slips to try and fit the prevailing medium, as the court may flag it as fraud. Instead, contact your bankruptcy attorney to determine whether your earning bracket allows you to proceed with a Chapter 7 claim.

The Two Bankruptcy Means Tests You Can Expect to Undertake

When you present your matter in court, the presiding judge administers two tests to establish how much you earn and how much you have as disposable income. Administering these two tests introduces a fair perspective compared to checking your bank account balance and issuing a determination, as not all funds may be disposable for use.

With your attorney’s help, you will provide all necessary documentation to the court to facilitate the completion of both tests. They are:

  • The Median Income Test

The California median income statistics are an essential reference point in bankruptcy cases, and the court will use the data when administering the means test. The Department of Justice is responsible for issuing the median income figure for California households, which is subject to change after a few months.

The judge establishes a household in court by considering the spouses, children, and other close family members or caregivers who live with you. Each person earning in the family should ideally contribute to household expenditures, so the court relies on a specific schedule to classify median income earners.

As of 2020, the median income for one person in a household was $60,000 per six months. If your annual income falls below this bracket, you will pass the means test and qualify for Chapter 7 bankruptcy.

Many households have more than one earner, so the court will also consider the median income in families with multiple earners. For example, the median income for two people earning $79,271 is $79,271, while that of three earners is currently $88,235 per six months. A four-person household with each person earning $101315 falls into this category, making it possible to file for Chapter 7 bankruptcy under these circumstances.

Households with an extra earning person beyond the four-person threshold can add $9000 per six months to the $101315 median income charge. The court will require you to provide proof of any person in your household with an income, if any, so you must consolidate all relevant documents. With your bankruptcy attorney’s help, you can assess the financial statements to ensure you fall below the limits.

While the court's requirements to assess a household’s median income provide workable figures, an ambiguity arises regarding who is a household member. For example, questions may arise about whether the court will consider a minor’s earnings from an internship or a summer program. The same uncertainty applies where one household member works freelance jobs with inconsistent income, making it difficult to predict how the court will reach a decision.

With your bankruptcy lawyer’s help, you can address these issues and seek clarification from the judge to increase your chances of a favorable outcome. You can also request that your attorney seek additional guidance from an accountant to help you remain within the correct confines.

You must also inform the judge of any changes in your income since presenting the document in court to ensure they assess your case based on current circumstances. For example, if you have been unemployed after presenting your financial statements for the means test, your attorney can help you raise the issue. Doing so as soon as possible is crucial because it prevents the court from reaching an unfair determination that would leave you with more difficult financial constraints. 

  • The Disposable Income Test

After establishing the income you receive depending on your type of household, you will undergo the disposable income test. It aims to determine how much money you can use to repay your creditors after caring for essential household needs for survival. Based on this, you should provide accurate details surrounding your monthly expenditures to avoid margin errors.

The deductions made during the disposable income test include your rent payments and the money you need to shop for food, clothing, and medical needs. If you have dependents, deductions include any money necessary to meet their needs, including school fees and primary medical expenses.

Your monthly deductions are assessed based on the standards issued by the Internal Revenue Service to ensure applicants do not present excessive claims. Since the means test operates within certain confines, you can expect the assessor to follow the threshold limits based on your household type.

If your household comprises one person with access to a vehicle, the deduction limits are $521 to meet emerging car expenses, $383 to meet food costs, and $157 to cater to emergencies and miscellaneous costs. The test also makes allowances for deductions related to housekeeping at $45 per month and purchasing clothes and other essential services for safe and healthy living at $85 per month. 

Deductions to meet your mortgage obligations are also important in calculating your disposable income. If you have mortgage payments to make every month, you can present the relevant documents to justify your claims and receive a deduction of $2335 for housing expenses. Further, a deduction of $254 for car maintenance and operation expenses also applies.

How Your Bankruptcy Attorney Helps Prepare for a Bankruptcy Means Test

When you need a solution to help you repay your creditors, working with an attorney is an excellent option, as they understand the inner workings of means tests. Your lawyer will give you essential pointers and undertake paperwork tasks to provide help in various ways. They include:

Educating You on the Means Test concerning Chapter 7 Bankruptcy

Many clients need to be made aware of the differences and implications of Chapter 7 bankruptcy claims compared to Chapter 13, leaving them disadvantaged. By partnering with a bankruptcy lawyer, you receive details about why Chapter 7 bankruptcy suits you and how to prepare for the means test.

Consolidate Your Financial Documents for the Required Duration

Additionally, bankruptcy courts are extremely keen when handling Chapter 7 applications and administering the means test because they know the potential abuse from people unwilling to repay their debts. Based on this, there must be more margin for error when presenting your financial statements and any other documents to justify your median income and eligibility for Chapter 7 bankruptcy.

With an attorney helping you consolidate your documents, you can worry less about presenting inaccurate records because they work as a team to identify discrepancies. Additionally, your bankruptcy attorney can liaise with third-party professionals to ascertain that your median incomes for the past six months accurately reflect the court's requirements.

Conveying Information to You on time

Sometimes, you may be unable to attend all court proceedings related to your application to file for bankruptcy because of additional obligations. Your lawyer is available to represent you in any court sessions where your attendance is optional to ensure you receive all orders that the judge issues.

Moreover, your attorney will provide legal advice based on the court's indication to help you meet deadlines without delay. With a reliable team, you can receive authorization to file for Chapter 7 bankruptcy within a few days or weeks of the initial claim, bringing you one step closer to repaying your creditors.

What to Do If You Fail the Bankruptcy Means Test

The court may rule that you do not qualify for Chapter 7 bankruptcy for various reasons, but the main one is that you have enough funds to repay your creditors. The presiding judge may also receive information about any previous fraudulent activities you were involved in, making it difficult to authorize your Chapter 7 claim.

Errors in the financial reports you present can also lead to a failed test, especially if you need a bankruptcy attorney to help you through the preparations. Despite this, you can request to modify the existing documents if you can show that your circumstances have changed since issuing the court documents.

Although the court may issue a rejection notice, you can consider reapplying after six months, mainly if your circumstances change. Exploring this option is important because the court does not allow appeals after the income test concludes. You can, nevertheless, take all steps necessary to ensure your next application goes smoothly.

For example, in the meantime, you and your bankruptcy attorney can establish the primary reasons for the initial rejection to ensure you present a valid claim in the following application. Alternatively, your attorney may advise you to file for Chapter 13 bankruptcy if you do not have a genuine claim under Chapter 7. In doing so, you should take less time to repay your creditors, who may decide to take legal action against you for delayed repayment.

Contact a Bankruptcy Attorney Near Me

Filing for bankruptcy is an excellent option when you or a loved one is working through a financial crisis. Since filing for bankruptcy involves debt forgiveness and asset liquidation, not all applicants qualify for the process. You must submit some tests before approval. Some of these include the means test, which helps determine whether your current earnings and means of livelihood are sustainable enough for bankruptcy claims.

Before presenting your bankruptcy application in court, you must verify all your financial documents and ensure you meet the threshold. In doing so, you are better positioned to receive approval for Chapter 7 bankruptcy, the most suitable option in individual cases.

At San Diego Bankruptcy Attorney, you will work with skilled bankruptcy attorneys who understand the importance of passing the means test. You can therefore expect to receive accurate preparation details to guide you in taking the test successfully. Our team is also ready to assist you in any procedures after the means test, including filing for bankruptcy. If you or a loved one needs more information about taking a bankruptcy means test in San Diego, California, call us today at 619-488-6168.