One of the highest “worry factors” surrounding filing for Chapter 7 bankruptcy in California is wondering if you will pass the "means test" required of all consumers filing for bankruptcy protection. As a Sacramento Bankruptcy Attorney firm, it's one of the most common concerns we hear. Many individuals are surprised to hear that you are not required to be flat broke and penniless in order to pass the means test and qualify for Chapter 7 bankruptcy protection, however, knowing more about the qualifications will help you resolve some of the fears associated with the bankruptcy process.
Median Income in California
The Chapter 7 means test was instituted by Congress in order to make it more difficult for individuals to discharge their debts without paying back the majority of their creditors. The test is designed to ensure that those that do successfully file Chapter 7 bankruptcy can't pay back their debts. To begin, the means test average income over the previous 6 months before filing a Chapter 7 bankruptcy petition in California is compared with the median income of the state, considering your household size.
These numbers are constantly evolving, therefore, you should ask your Sacramento Bankruptcy Lawyer about what figures the US Bankruptcy Court in your district is using. If your income is less than the median income of California, then you automatically pass the means test and you aren't required to fill out the remaining information.
Chapter 7 Means Test
If your income is higher than the median income in your state, you may still qualify. The income calculation takes into account all payments from not only your wage or personal business income, but also income from investments. The means test works by considering monthly expenses such as mortgage or rent, car payments and insurance, food, electricity, internet, and cell phone bills, and deducting these from your average income over the 6 months prior to bankruptcy. Once your current monthly income is established and subtracted from your eligible expenses you are left with your disposable income, and the bankruptcy court will decide if you have enough money left over to pay back your creditors. If you do, then you may be required to convert your Chapter 7 to a Chapter 13 bankruptcy case.
If You Do Not Pass the Means Test
If you do not pass the means test in California, it's not the end of the world, but you will have a few decisions to make. Consult your bankruptcy attorney as to whether it is sensible to convert your bankruptcy case to a Chapter 13 bankruptcy. This alternative form of bankruptcy lasts longer and will require you to live on a fairly strict budget for up to 5 years in order to pay back your creditors, but should leave debt free at the conclusion. Additionally, if you do pass the means test, it may not be in your best interest to actually move forward with your Chapter 7 bankruptcy. Only a California bankruptcy attorney is qualified to give you advice on how to fill out your bankruptcy forms and whether you should move forward with filing or not.