Chapter 7 is a common option for those seeking to eliminate overwhelming debt and get a clean financial slate. However, before one can file for this type of bankruptcy, they must pass what is known as a “means test”.
The means test is a critical aspect of the bankruptcy process in California, whose purpose is to ensure that the system is fair both to debtors and creditors. For this reason, it is crucial to understand how this particular aspect of the process works.
Of course, whether you grasp the nuances of calculating the means test or not, it is highly advisable to consult with reputable San Diego Chapter 7 bankruptcy lawyers, as they can provide personalized guidance tailored to your particular financial situation.
How do you pass the Chapter 7 means test?
Passing the means test is the first step in pursuing bankruptcy relief. It entails evaluating your income, expenses, and overall financial situation to determine whether you qualify for Chapter 7 or if you should consider alternative options such as Chapter 13. In other words, the goal of the means test is to assess if you have the means to repay your debts.
What are the criteria for passing the means test?
To pass the means test in California, you’ll have to prove that your household income is below the median income for a household of your size. If your income is below the threshold or close to zero, you automatically qualify for Chapter 7 bankruptcy and can proceed with the filing.
Even if your income is above the said threshold, it is no reason to despair. That doesn’t necessarily mean that you’re ineligible and you’ll still be able to move on to the second part of the means test to further determine your eligibility.
This is done by filling out and submitting several Chapter 7 Mean Test forms, namely:
- Form B 122A-1: Chapter 7 Statement of Your Current Monthly Income;
- Form B 122A-1 Supp: Statement of Exemption from Presumption of Abuse Under §707(b)(2);
- Form B 122A-2: Chapter 7 Means Test Calculation.
Out of the three, Chapter 7 Means Test Calculation is the one critical for determining your eligibility, so we’ll break it down.
How is the means test calculated?
The means test calculation is a two-step process that, in a nutshell, involves subtracting allowable expenses from your monthly income, in order to determine your disposable income and, by transition, your ability to repay the creditors.
Step 1: Calculating Current Monthly Income (CMI)
CMI is calculated by averaging your income over the six months preceding your bankruptcy filing and takes into consideration sources like wages, self-employment income, rental income, and more. Do note that some sources are exempt from this calculation, most notably:
- Social security payments;
- Unemployment compensation;
- Child support & alimony;
- Workers’ compensation;
- Veterans’ benefits.
While the aforementioned sources are often excluded, the specific rules and regulations will still vary based on your circumstances.
What can you deduct in a means test?
Once you’ve calculated your CMI, you’ll deduct allowable expenses to arrive at your disposable income. These are based on IRS guidelines and local standards, which can vary by location, so be sure to familiarize yourself with regulations before proceeding with this step.
Step 2: Deducting Allowable Expenses
Allowable expenses include expenditures necessary for living, and most commonly include:
- Housing: rent/mortgage payments, property taxes, insurance, utilities;
- Transportation: vehicle loan payments, fuel, maintenance, public transportation;
- Food & clothing: groceries and garments for you and your family;
- Healthcare: medical and dental expenses not covered by your insurance;
- Childcare: costs of caring for your children while you work;
- Charity: regular payments to qualified charitable organizations.
After you’ve subtracted these factors, what you’ll arrive at is your disposable income – i.e. the funds available to repay the creditors.
Where in San Diego can I find reliable Chapter 7 bankruptcy lawyers?
Law Offices of Mark L. Miller are located at the Old Town San Diego, just a few blocks away from Whaley House Museum. Here, our team of seasoned attorneys offers comprehensive legal guidance with bankruptcy cases, including Chapter 7, 11, and 13.
With a quarter of a century of experience, we’re the leading experts on California bankruptcy laws in the region and we’re ready to employ our collective expertise to help you regain your financial independence. Get in touch with us today!