PASSING THE “MEANS TEST” TO Qualify for Chapter 7 Bankruptcy Relief
How to qualify for Chapter 7
Question: Do you have to pass a “means test” to qualify to file for Chapter 7 Bankruptcy relief?
Answer: Yes. per the 2005 bankruptcy law (BAPCPA), a “means test” must be used to determine on who can qualify to file for a Chapter 7 bankruptcy relief. Many people think this the “means test” test may prevent them from filing. But, chances are, they are wrong. Most people considering Chapter 7 bankruptcy have no trouble passing the means test. Indeed, the consensus is that more people will qualify for Chapter 7 under the means test than under the old law, where judges had no fixed formula.
The “Means Test” Formula: The law now uses a standard mathematical formula to determine if a person qualifies for Chapter 7 Bankruptcy relief. Or, if filing for Chapter 7 relief would be an ‘abuse’ of the bankruptcy system. For reference, those who fail the means test, are left with a Chapter 13 repayment plan as an alternative bankruptcy option.
2 Part Formula Used in Means Test: The means test is actually a two-part test and you only need to pass one of the 2 tests in order to qualify for Chapter 7 relief.
Test 1. “Median Income” (Form 22A-1): This is a very simple test that compares your average household income for the past six calendar months to the median income for your state, If your income is below the median, you qualify for Chapter 7. Below is a detailed list of the median income for the State of California. If you/your family’s income is above the median, you must then go on to pass Test 2.
Test 2. “Disposable Income” (Form 22A-2): This test deducts expenses from your income to determine how much you can pay your unsecured creditors over the next five years:
- If you can pay at least $12,475 ($207.92 per month), you can’t file for Chapter 7.
- If you can pay at least $7,475 (about $124.58 per month); and that is
- At least 25% of what you currently owe your unsecured creditors, you can’t file for Chapter 7.
- If your disposable income is less than $124.58 per month, you can file for Chapter 7.
“Allowable deductions” can be used to reduce your monthly income: Certain deductions are standard allowances based on the number of vehicles you operate, the number of people in your household, and the cost of living in California. In addition, to these standard deductions, you can also deduct the full amount of certain actual expenses such as (1) mortgage and (2) vehicle loan payments; as well as (3) taxes (i.e.: the monthly amount withheld from your pay for taxes (i.e.: The total monthly amount that you will actually owe for federal, state and local taxes, such as income taxes, self- employment taxes, social security taxes, and Medicare taxes) but not your real estate, sales, or use taxes. Other allowable deductions include (4) involuntary deductions necessary for work purposes (i.e.: The total monthly payroll deductions that your job requires, such as retirement contributions, union dues, uniform costs, educational costs if required as a condition for your job); as well as (5) Life insurance; (6) Court-ordered payments; (7) Childcare: The total monthly amount that you pay for childcare, such as babysitting, daycare, nursery, and preschool; plus (9) Additional health care expenses.
Please See the Below Chart for a quick further reference, as it will assist you in your initial consultation with one of our attorneys.
|If LESS <||California Median Income Test
Form B122A-1 (Line 13)
|> If MORE|
Chapter 7 is an option.
Not legally required to complete Form B122A-2, but may want to anyway.*
You must complete
Form B122A-2 to determine if Chapter 7
Most Important: If you FAIL the means test, can a judge allow you to file for chapter 7 relief anyway?
ANSWER: YES! Often a judge can and will allow you to file for Chapter 7 bankruptcy even if you fail the means test, but you must have the assistance of a quailed bankruptcy attorney to assist you and you must be able to show “special circumstances.” Some examples of possible “special circumstances” are job loss or pay cut, a serious medical condition, or unusually high child care expenses. You must be able to produce proof of your expenses and that your expenses are reasonable — and that you have no reasonable alternative. This is an area where a having a qualified bankruptcy attorney is critical to your possible qualification for Chapter 7 relief where you fail the “means test”
Allow the Law Offices of Eugene A. Ahtirski assist you in taking all legal and ethical actions possible to determine if you can file for chapter 7 bankruptcy relief.