Do I Qualify for a Chapter 7 Bankruptcy?

OPTION 1:

Means Test – Median Income

means test check listThe Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 created a so-called “means test”, which will be applied to Chapter 7 bankruptcy petitions, filed on or after October 17, 2005, if the debtor is an individual with primarily consumer debts. The means test will determine if the debtor is eligible for a Chapter 7 or if they file a Chapter 13 for relief.

In order to pass the means test, you must have little or no disposable income. To determine whether you qualify for a Chapter 7 bankruptcy, the means test compares your average monthly income for the six-month period preceding your bankruptcy to the median income of a similar sized household in California.

For 2018, California uses the following median income thresholds to see if you qualify for bankruptcy:

Household Size Maximum Annual Median Income
1 $54,787
2 $73,162
3 $79,061
4 $91,349

(Add $8,400 for each individual in excess of 4.)

[NOTE – According to bankruptcy requirements the median income is determined NOT by counting the last 12 months or the last tax return but by doubling the last 6 months of income. This can often help people who are not otherwise able to qualify to meet the median income test.]

Your current monthly income equals the average monthly gross income that you (in a joint filing, you and your spouse) received from all sources. This includes any amounts paid by any other entity on a regular basis for the household expenses of you, your spouse (in joint filings), and/or your dependents, over a six-month period immediately preceding the bankruptcy filing. Social Security benefits, payments to victims of war crimes, crimes against humanity, and terrorism may be excluded.

If your income is under the maximum annual income, you automatically qualify for a Chapter 7 bankruptcy.

 

OPTION 2:

Qualifying for a Chapter 7 if You Have Business Debt
Which Exceeds 50% of Your Total Overall Debt

If you have too much income and cannot pass the means test but have business-related debt, there is a way to qualify as a non-incorporated business bankruptcy so long as the debtor’s debt related to his/her business is more than 50% of the total debt of the person. Business debt can even include any debt from rental properties you own, even if you are working as an employee for someone else.

 

OPTION 3:

If Your Income is Above the Allowable Median Income
and You Have Little or No Business Debts

What happens if your income is above your state’s median and you have little or no business debt? While many debtors believe that such a scenario precludes them from filing Chapter 7 bankruptcy, this is not necessarily true.

If your income is above median, you must complete the comprehensive portion of the means test instead of qualifying simply based on your income. The comprehensive means test is essentially a balancing stage where your expenses are weighed against your income.

Generally, allowable expenses include living expenses (determined under the IRS National Standards based on your family size and gross monthly income for certain expenses) and the actual amounts of other necessary expenses.

While this may seem simple enough to determine, bear in mind that the “value” of a given expense depends on a number of complicated formulas. Thus, it is very important to speak with an experienced bankruptcy attorney to decide the proper course of action.

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