The first step in determining whether an individual qualifies for a bankruptcy, is to review the gross annual income. The most frequently discussed test is the Bankruptcy Means Test. This test requires the individual petitioning for bankruptcy to enter his or her income and expenses in the appropriate form. The forms are available on the United States Courts website Bankruptcy Means Test Forms. The information is used to calculate whether the debtor’s current monthly income is sufficient to pay necessary expenses and make payments to creditors.
The bankruptcy means test uses the medium income in California to initially determine whether an individual filing for bankruptcy earns enough to pay back creditors. In the event the bankruptcy filer earns above the medium income, the means test will need to be thoroughly completed. The outcome of the means test will determine whether the bankruptcy petitioner can file under a chapter 7 bankruptcy or a chapter 13 bankruptcy.
A chapter 7 bankruptcy is a complete liquidation. The trustee, who is assigned to oversee the bankruptcy, will sell off the bankruptcy filers’ assets and use the proceeds to pay back creditors. In California, there are laws referred to as exemptions. Exemptions are used to protect assets and, quite often, bankruptcy filers are able to protect all of their assets. However, no all bankruptcy filers are able to protect their assets and its important to talk specifics with a bankruptcy attorney in Sacramento. A chapter 7 bankruptcy only lasts approximately 90-120 days.
A chapter 13 bankruptcy is a payment plan. The payment period lasts anywhere from 3-5 years. A chapter 13 bankruptcy is typically for individuals who are behind on their mortgage payments or make too much money to qualify for a chapter 7 bankruptcy.
The medium income is regularly updated by the United States Trustee’s Office. Below are the numbers for filings after April 1, 2020, update:
|Gross Annual Income|
The formula for calculating the means test is simple. The potential bankruptcy filer will calculate the monthly average of their gross wages from employment. The average is calculated from the past six months. Next, multiple the average monthly gross wages by twelve months.
(Sum of Gross Wages for Six Months) / (Six Months) = (Average Monthly Gross Wages)
(Average Monthly Gross Wages) * (Twelve Months) = (Gross Annual Income)
The bankruptcy filer will compare their gross annual income with the medium income for California. For example, a married couple John and Suzy earn a joint annual gross income of $55,000. In California, the medium income for a household size of two is $79,271. John and Suzy would satisfy the bankruptcy means test. If, however, John and Suzy earn a joint annual gross income of $95,000, they would not longer satisfy the simple initial test. John and Suzy may still qualify for a chapter 7 bankruptcy, but they will need to provide more information on their expenses. Filing bankruptcy without spouse will not solve the problem if the bankruptcy filer is above the medium income.
Those who earn above the medium income need to demonstrate to the court that a chapter 7 bankruptcy is still the best option; otherwise, it’ll be a repayment plan under chapter 13 bankruptcy. The second portion of the test considers reasonable and necessary expenses along with income. After the expenses, is there sufficient disposable income to make payments to creditors and pay the administrative expenses of a chapter 13? If so, chapter 13 bankruptcy might be the only option.
Our Sacramento bankruptcy attorneys help individuals considering their options. We can determine whether an individual qualifies for bankruptcy and perform a means test before filing bankruptcy with the court. There are other considerations in filing bankruptcy and our office has handled countless strange situations. There are frequent mistakes made before filing bankruptcy that should be considered too. Feel free to contact Sacramento bankruptcy attorneys to set up a free initial meeting. Our attorneys walk clients through the entire process and practice questions before the meeting of creditors.
By: Trevor Carson
*The information provided in this post does not constitute legal advice or opinion. The information is for guidance purposes only. Individual situations vary and you should contact an attorney for a consultation. This post is considered a solicitation and advertisement. The post does not warrant the outcome of any matter. Sacramento Bankruptcy Attorney on the means test and qualifying for bankruptcy.