When you make the decision to file a bankruptcy petition in California, you must carefully consider whether it would be most beneficial file your petition under either Chapter 7 of the bankruptcy code, or under Chapter 13. The latter involves creating a payment plan that will see you repaying a percentage of the debt over the next three years to five years. Your bankruptcy lawyer will help you draw up this plan, which is subject to the approval of the court as well as your creditors. Any secured debts, including your mortgage, would be paid as normal outside of the bankruptcy, but unsecured debts will be repaid on a fractional basis, depending on your disposable income and non-exempt property.
The California disposable income means test was specifically formulated to prevent high income earners from abusing the system by filing your bankruptcy under Chapter 7, which wipes out all your debts. If you are a higher income earner and you fail to satisfy the disposable income requirements of the Chapter 7 bankruptcy means test, it may still be possible for you to apply for bankruptcy under Chapter 13. It only means that you will repay a fractional portion of the debt.
You don't need to be completely broke to apply under Chapter 7 either. If you have significant reasonable expenses, including taxes, car loans, and a high mortgage, you may still qualify to apply under Chapter 7, despite the fact that you earn a good monthly income.
The means test typically only applies to filers in higher income brackets and exemptions apply if:
- The majority of your debts are business-related;
- You are a disabled veteran who incurred debt during active military duty or in performing homeland defense activities.
If you file under Chapter 7, the assets you own will form a part of your bankruptcy estate temporarily, and the trustee will sell all the non-exempt property in order to repay the creditors. It's unusual for debtors to lose any of their property when they file under Chapter 7 thanks to California’s bankruptcy exemptions. However, in order to qualify to apply under Chapter 7, you have to complete a means test, which is dependent on your income. However, you may still qualify for bankruptcy under Chapter 7 if you earn an above-average salary.
The California bankruptcy means test seems basic enough, but it can be quite a bit more complex in application. For that reason, bankruptcy lawyers are available to ensure that you take advantage of all the available deductions. Even the smallest of errors on the income and repayment means test can make a huge difference. It may show that you must apply for a Chapter 13 bankruptcy case. This code involves five years worth of repayments, while you actually qualify to apply for bankruptcy under Chapter 7 which can eliminate all your debt in the next three to four months.
Chapter 7 Bankruptcy: Passing the Chapter 7 Means Test in California
As of November 1, 2016, families of four who earned less income than the median California income of $83,012 (excluding Social Security) were excluded from satisfying the means test completely. If you earn less than that, you do not have to complete a means test.
Families in the upper income brackets have to complete the means test before they can qualify for bankruptcy in order to prevent anyone from abusing the system,
California's bankruptcy means test is based on the income of families of similar sizes. Whether you're single or have a family of four, your income bracket is compared to that of a household of similar size. Special circumstances and the big picture regarding your situation will be taken into consideration, even if your expenses are not enough to help you meet the requirements of disposable income means test for Chapter 7.
While calculating the means test, be sure to include all your income sources, including:
- Rental income
- Business income
- Dividends and interest
- Unemployment income
- Assistance received from others towards your household income
If you struggle to satisfy the disposable income means test for Chapter 7 debt relief, and you are anticipating a loss of earnings, you could consider delaying your filing for a number of months, if possible. After a number of months of reduced income, your average monthly earnings may well be sufficiently low to qualify for filing a Chapter 7 case.
It is important to note that the disposable income means test does not apply to business-related debts, but only to personal consumer debts. If more than half of your total debt is business-related, this test will not apply to you. Chapter 7 will apply to you regardless of your disposable income.
As a small business owner in California, your business debt is typically incurred in order to increase profits in your business. As such, expenses charged to the company credit card for business travel will count as business debt, while your mortgage is a personal debt, and that can sway the business-to-personal debt ratio toward the latter.
California Means Test and Filing for Bankruptcy
Applying for bankruptcy is a complex and intimidating experience. While online means test calculators can give you a rough idea as to where you stand, it would be better to consult with a professional bankruptcy attorney who can help you file a bankruptcy petition correctly.
Chapter 7 protection will only be available to you if you satisfy the means test.
Step 1 - Median Income
Step one of California's bankruptcy means test involves comparing your average total monthly income (for the six months leading up to the application date) to that of the median income of the average California household of a similar size. The means test will help you calculate the amount of disposable income available to you, which is helpful if you are trying to decide whether you should apply for Chapter 7 or 13.
In order to qualify for bankruptcy under a Chapter 7 application, your monthly earnings must be lower than the California median income. However, if your income exceeds the average income for a California-based family of a similar size, you must satisfy the repayment means test to apply under the Chapter 7 bankruptcy code. Therefore, the means test does not apply if your earnings fall below the median income.
As of November 1, 2016, California's median income is:
- $51,764 ($4,314 a month) for single income earners;
- $69,370+ for households with two or more people.
If your average income (based on the six months leading up to the filing) exceeds the median income, move on to step two of the California disposable income means test.
Step 2 - Funding a Chapter 13 Payment Plan
Can you afford to fund your chapter 13 payment plan? Not all your actual expenses can be deducted from your income based on the income means test. Expenses such as car loans or mortgage repayments may be deducted, however the disposable income means test uses local and national standards as supplied by the Internal Revenue Service and Census Bureau for the majority of your living expenses. Luxury expenses will not be deductible under a Chapter 13.
To calculate whether you can repay a percentage of your debt, establish your total monthly income and reduce the permitted monthly expenses. By doing this, you should be able to put an amount to your disposable income. Your house and car payments may be subtracted. Your other allowable expenses (health care costs, housing, transportation and other living expenses) will be based on the local standards.
Other deductions can include child care costs, court-ordered payments, payroll taxes and some insurance costs.
Step 3 - How Much Disposable Income Do You Have?
Based on figures from 2016, your disposable income should total less than $125 for you to satisfy the means test, which means that you are able to apply for filing under Chapter 7 bankruptcy code. However, if the monthly disposable income figure in your budget exceeds $207, you may not apply for Chapter 7. However, if the disposable income figure falls somewhere in between, there is another step to satisfying the means test.
Multiply the monthly disposable income figure by sixty. The answer is the amount you are able to pay your creditors through a Chapter 13 case payment plan. Add up all your non-priority, unsecured debt, including medical debt and credit card bills. Take the total and divide it by four.
If your figure in 1) is lower than that of 2) you do lack sufficient disposable income available to repay twenty-five percent of all the unsecured debt you have incurred over the next three to five years. That means that you still qualify to file under Chapter 7. However, if you will have enough money to service the debt, you must apply for Chapter 13.
In addition to the means test, bankruptcy courts apply a variety of other measures to evaluate your case before determining whether or not you qualify to file under Chapter 7 bankruptcy code. However, if you meet the requirements for a Chapter 7 bankruptcy based on the above calculations, but your lifestyle is luxurious, the court will probably not approve your Chapter 7 filing. On the contrary, if your income exceeds the limits for a Chapter 7 case, but you can demonstrate the need to file for bankruptcy under Chapter 7 code instead, the court will probably grant it.
How to Determine Eligibility Using Means Tests
The US Bankruptcy Court website contains downloadable forms that you can fill out in order to determine eligibility for a Chapter 7 bankruptcy application based on the means test as well as instructions on how to use the forms.
The forms include:
- Statement of Current Monthly Income Form for Chapter 7 (122A-1): Form 122A-1 aims to determine where your income falls on the median income in California. If your income falls below the median, you qualify to file under Chapter 7 bankruptcy code. That means that you do not have to complete the other forms.
- Means Test Calculation Form (122A-2): Form 122A-2 will help you deduct the allowed expenses in order to determine how much of your disposable income can be used to cover the expenses of your Chapter 13 bankruptcy payment plan. Complete this form if your income falls above the median to establish whether you might qualify.
- Statement of Exemption from Presumption of Abuse Under § 707 (b) (2) Form (122A-1Supp): Form 122A-1 Supp will help you determine whether you may be exempt from the California means test for applying for Chapter 7. This is the case with certain people, such as military members who do not have to take a means test.
How to Satisfy the Means Test
Just because you passed the means test does not mean that you qualify to apply for bankruptcy under Chapter 7 code by default. The court will still consider additional documents, namely:
- Schedule I: Income Schedule, and
- Schedule J: Expenses.
If there is sufficient disposable income left of your monthly income after your permissible monthly expenses have been deducted, the court may convert the Chapter 7 bankruptcy case to Chapter 13 under the bankruptcy code.
Meeting the standards of the Chapter 7 bankruptcy means test only means that you can file under Chapter 7, and not that you should. You should discuss the best options for your needs with an experienced San Diego Bankruptcy Attorney. It is impossible to discuss all the variables in a mere article, as each detail warrants personal attention and individual consideration.
If you don't satisfy the means test, there will be no option other than filing under the Chapter 13 code. That requires that you draw up a strict budget. Your bankruptcy attorney will assist with this process. Funds from your disposable income will be allocated to monthly payments that will be court monitored and paid to your creditors for three- to five years. That is why most people prefer chapter 7 filings, which wipe out your debts.
However, if you wish to cure a mortgage default, Chapter 13 will provide the best possible remedy. Also, arrears on spousal or child support and taxes will not be wiped out by bankruptcy, which makes Chapter 13 a better option.
Choosing the right bankruptcy chapter is more complex than just a means test or a simple preference. It comes down to your specific situation, which requires expert legal consideration and an in-depth assessment of your financial circumstances.
If you feel as though you are drowning in debt and you see no way out of it, it may be time to look at drastic debt relief in the form of a Chapter 7 bankruptcy or even Chapter 13 bankruptcy. However, be careful not to rely on second-hand information from other people who have gone through the process. Your situation is unique and your financial future is at stake. Get expert help today by calling 619-488-6168 and request an initial case review with a professional San Diego Bankruptcy Attorney.