How The Means Test Applies To Chapter 7 Bankruptcy
Chapter 7 bankruptcy can provide welcome relief from unmanageable bills and excessive debts. However, if you wish to qualify, you must pass the means test or get an exemption.
An experienced Chapter 7 lawyer can walk you through the means test. Call my firm, The Law Offices of Diane Anderson, today at 209-717-6150 for a free consultation.
How Can The Means Test Determine Your Eligibility?
A means test assesses your income and determines if it is low enough to file Chapter 7 liquidation bankruptcy. The means test is a formula designed to ensure higher wage earners cannot completely wipe out their debts through Chapter 7. Instead, high-wage earners must file Chapter 13 to reorganize and repay their debts. The Chapter 7 means test assesses your income and allows you to deduct reasonable expenses, such as your mortgage. First, your current monthly income is calculated by averaging your income over a six-month period. Then, you determine your disposable income by deducting expenses for your health and welfare, including:
- Involuntary deductions (such as union dues, uniform costs, and mandatory retirement plans)
- Insurance (such as health, short- and long-term disability, and life)
- Secured debt payments (such as your mortgage and car loan)
- Court-ordered payments (such as alimony and child support)
- Child care expenses
- Health care
- Care of elderly, a disabled child, or a chronically ill person
- Charitable contributions
All expenses deducted from your income must be “reasonable.” The court determines reasonableness according to state and local averages.
Determining eligibility through the Chapter 7 means test can be difficult. You may be unsure of what is considered disposable income and what may be deducted. A skilled Chapter 7 bankruptcy lawyer can help you with this process.
What Income Do You Need To Include For The Means Test?
When navigating the Chapter 7 means test, you will have to provide all of your sources of income to your attorney. That may include actual wages earned or other funds you receive regularly, including the following:
- Salary and wages
- Tips, bonuses, commissions, and overtime pay
- Business income
- Farm income
- Dividends, interest, and royalties
- Income from rental and other real property
- Child support an alimony payments you receive
- Compensation from unemployment benefits
- Retirement account income or pensions
- Workers’ compensation benefits
- Payments from annuities
- Disability benefits you receive regularly
You may not have to include lump sum payments in your calculation; however, if they have been received recently, you may have to report them. You should speak with a skilled lawyer when dealing with the Chapter 7 means test to determine what counts as your income.
What Counts As Disposable Income?
By evaluating your finances, the bankruptcy court is determining whether you have enough disposable income to pay your debts. Disposable income is that which is left over after paying your allowed monthly expenses. Allowed monthly expenses include things like rent, utilities, groceries, and other necessary items for your health and well-being.
If you have a significant amount of disposable income, you may be required to pay some of your debts. This may include both secured and unsecured debts. Secured debts are those that are attached to physical property, such as a home or car. Unsecured debts include things like medical expenses and credit cards.
If your income level is above the median level and you have disposable income, you may be disqualified through the Chapter 7 means test. However, you may still be able to file bankruptcy through Chapter 13 or another form. Most people who have a significant amount of disposable income qualify for Chapter 13 bankruptcy.
Are There Any Exemptions?
Certain situations result in automatic exemption from the Chapter 7 means test. For example, if your debts are not primarily consumer debts, you may be exempt. Also, if you are a disabled veteran and your debt was incurred primarily during active duty, you may be exempt. Some people may have income that is so low, they are exempted from the Chapter 7 means test. This is determined by comparing your household income to the median income in your state. If your income is less than the median income according to size, then you may automatically qualify for Chapter 7 bankruptcy. It’s important to note that the median income in each state changes annually. The California median income:
- 1-person household – $47,798
- 2-person household – $62,009
- 3-person household – $66,618
- 4-person household – $75,111
- 5-person household – $83,211
- 6-person household – $91,311
- 7-person household – $99,411
- 8-person household – $107,511
- 9-person household – $115,611
- 10-person household – $123,711
If your average monthly income is less than $3,983, then you automatically qualify for liquidation bankruptcy without going through the Chapter 7 means test. However, if your average monthly income is over $10,309, then you don’t automatically qualify. It’s important to remember that your income is calculated after certain deductions.
An experienced Chapter 7 bankruptcy lawyer can help you evaluate your income level and determine if you need to take the Chapter 7 means test. If you bring information about your forms of income and other assets to a skilled attorney, they can walk you through the process of determining if you qualify for an exemption.
Do You Need To Provide Any Forms?
In order to determine if you qualify for Chapter 7 bankruptcy with the means test, you must complete several forms, including:
- 122A-1 – This is a statement of your current monthly income and determines whether your income is below the median income of your state.
- 122A-2 – This form assesses your income if it is over the median income by deducting allowable expenses.
- 122A-1Supp – This form is a statement of exemption that may be completed by some members of the military and other qualifying individuals.
What Happens If You Fail The Means Test?
If you make too much money or fail the Chapter 7 means test for another reason, you may have to dismiss your Chapter 7 bankruptcy case or convert it to another type of bankruptcy. However, you may claim that you should be allowed to file Chapter 7 due to special circumstances. If the court finds that you do have special circumstances, then you may be able to continue with a Chapter 7 bankruptcy.
Special circumstances may include:
- Recent job loss
- Extended unemployment
- High rent or other excessive bills
- Serious or expensive medical condition
In order to show that you have special circumstances and should be able to file Chapter 7, you must provide the court with documentation of your situation. This may include additional court forms as well as submission of outside evidence. You should work with a skilled bankruptcy attorney to achieve a special circumstances exception in your case.
Are There Any Mistakes You Should Be Aware Of?
The Chapter 7 means test is complex. If you try to file bankruptcy alone or determine if you qualify by yourself, you may fall into one of the following traps:
- Taking the Chapter 7 means test without needing to – You may qualify for an exemption and the Chapter 7 means test is not required. Talk to a bankruptcy attorney to find out if you qualify for Chapter 7 bankruptcy without taking the Chapter 7 means test.
- Reporting the wrong size of household – You may include all of your dependents in your household size. It’s important to report the correct household size because that will be used to determine the median family income for the Chapter 7 means test.
- Incorrectly reporting your income – It can be difficult to know what to report for income, as well as how long a period of time you need to report. The number of weeks in a month and the way in which your pay periods fall can make this a difficult task.
- You list child support or alimony, but don’t actually receive it – Even if the court orders child support or alimony, if the other party does not pay it, you don’t have to report it.
- You miscalculate your deductions – The bankruptcy court only allows certain deductions from your income. It can be difficult to know what qualifies as a valid deduction.
It can be easy to make mistakes when navigating the process. However, you don’t have to do it alone. As someone who has filed for Chapter 7 bankruptcy before, I know how difficult it can be. Let us help you navigate bankruptcy with confidence.
Feeling Lost? My Firm Can Help.
Before filing for bankruptcy, you must determine if you are eligible for Chapter 7 liquidation. I can help you with the Chapter 7 means test and filing the necessary forms. Call The Law Offices of Diane Anderson today at 209-717-6150 for more information or fill out my online contact form.