Changes to the Bankruptcy Code in 2005 affected who is eligible to file for Chapter 7 bankruptcy in California and across the country. The addition of the means test analysis, which determines whether you must file for Chapter 7 or Chapter 13 bankruptcy, was one of the modifications. If you have a household income that is greater than the state median for your household size, you are required to conduct a means test analysis. Those whose debts are predominantly non-consumer debts are also exempt from completing a means test analysis. Therefore, if the preponderance of your debts are business-related, you will not be required to complete a means test analysis.
In California, as in all states, the median household income as determined by the Census Bureau is used to determine whether a means test analysis is required. If your total household income exceeds the California median annual income, you will be required to complete a means test to determine if you are eligible to file for Chapter 7 bankruptcy. The last six months of your gross income are used to estimate your annual income. The following median income applies to cases filed in California after March 15, 2010:
FAMILY SIZE - 1 EARNER - 2 PEOPLE - 3 PEOPLE - 4 PEOPLE
California - $47,969 - $64,647 - $70,638 - $79,194 - $79,194
The median household income fluctuates and is amended nearly annually. The updated median household income for the state of California can be found on the website of the US Trustees, along with updated median income tables.
The amounts indicated above are based on your household's annual gross income. Who must be counted and who can be counted as part of your household, as well as who's income must be counted, can affect whether a means test analysis is required to qualify for Chapter 7 bankruptcy in California. In order to qualify for Chapter 7 bankruptcy, a means test is not necessary if your income is below the median for your household size.
Are You Eligible for Chapter 7 Bankruptcy if You Do Not Need to Complete the Means Test?
If you are not required to conduct a means test analysis, you are not automatically eligible for Chapter 7 bankruptcy. To determine your eligibility, you must also consider whether you have sufficient funds to pay off your creditors. After paying monthly necessities, there is a high likelihood that you will qualify for Chapter 7 bankruptcy if you have less than $100 remaining. Rent, utilities, food, clothing, medical and dental expenses, car insurance, car payment, car maintenance, petroleum, and health insurance are considered necessary expenses. If you have less than $100 to pay your creditors after deducting reasonable amounts for each, you may qualify for Chapter 7 bankruptcy. Typically, you will deduct necessary expenses from your monthly net income (income minus taxation) to determine this.
When deducting your monthly expenses, keep in mind that they must be reasonable for each item. It is unlikely that the court will permit the following scenario:
Gross monthly income of $3000 for a one-person household. After income taxes are deducted, he is left with a net monthly income of $2,200 for expenses. His monthly expenditures are $2,150. Although he has less than $100 remaining to pay creditors, his monthly budget deducts $800 for food due to eating out with companions. A $800 monthly food expenditure for a single individual would be considered abusive unless there was a special explanation.
If you have disposable income available to pay creditors, the Trustee may file a motion for abuse. If you have more than $100 remaining to pay your creditors, you may need to file for Chapter 13 bankruptcy. You may be required to complete a 36-month payment plan in which you pay creditors with your monthly disposable income.
What Happens if Your Income Exceeds the Median?
If your income is greater than the median for your household size, you will need to take an additional step to determine if you qualify for Chapter 7 bankruptcy. The means test analysis is a test that requires you to input your gross income for the past six months, then deduct IRS standard allowances for housing, food, medical, and transportation expenses. Taxes, health insurance payments, term life insurance, secured payments, child care, education expenses for children under 18, charitable contributions, alimony, child support, and payments for taxes owed to the IRS and state are also considered by the IRS when determining if there is sufficient disposable income to pay creditors. If there is no disposable income after deducting these expenses using a means test analysis, Chapter 7 bankruptcy can still be filed. Here you will find the standard deductions that the means test analysis employs for certain items.
If you fail the means test analysis and earn more than the median income, you may be required to complete a 60-month Chapter 13 repayment plan to your creditors. The Trustee may file a motion for abuse if you file for Chapter 7 bankruptcy without satisfying the means test. If the trustee files a motion for abuse, you will be required to defend yourself and demonstrate that special circumstances make you eligible for Chapter 7 bankruptcy.
You must consult with an experienced bankruptcy attorney to determine if filing for bankruptcy is a viable option for you. There are a number of additional factors that can affect your eligibility for bankruptcy and your decision to file for Chapter 7 bankruptcy. Considerations such as the value of your assets and the nature of your obligations can affect whether bankruptcy is a viable option for you.
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