In the face of overwhelming debt, filing for Chapter 13 bankruptcy presents individuals with a regular income with the means of overcoming financial difficulties and regaining their economic independence.
However, before being allowed to restructure their debt, filers must pass the so-called “means test”. This is a critical element of the California bankruptcy system that not only determines an individual’s eligibility for Chapter 13 but also ensures the ensuing repayment plan is fair to both creditors and filers.
While the nuances of the means test itself aren’t extremely difficult to grasp, navigating the intricacies of the following process is. For this reason, it is highly advisable to enlist the help of a reputable Chapter 13 bankruptcy attorney in San Diego, in addition to familiarizing yourself with the basics of the process provided in this guide.
What is the means test for Chapter 13?
As hinted in the intro, the means test is a comprehensive financial evaluation, whose purpose is to ascertain whether the individual has the capacity to pay off a portion or the entirety of their debt, thereby determining their eligibility to file for Chapter 13 of the US Bankruptcy Code.
This is done by comparing your disposable income to the state median household income, leading to one of two possible outcomes:
- Disposable income is above the threshold:
- The repayment plan will last for five years (60 months);
- Disposable income will be used to pay off secured and priority debts first;
- The remainder will go toward repayment of the unsecured debts;
- Disposable income is below the threshold:
- The repayment plan will last for three years (36 months);
- Disposable income will be used to pay off secured and priority debts first;
- You may end up not paying anything toward unsecured debts.
How is disposable income calculated in Chapter 13?
Disposable income refers to the amount that remains after you’ve deducted all living expenses from your average monthly income. Said expenses are standardized based on the IRS guidelines, and clearly defined in the form B 122C-1, which is officially used to calculate disposable income in Chapter 13 bankruptcy.
How do I figure out my disposable income?
To calculate your disposable income, you should follow these steps:
- Determine your monthly income by calculating the average monthly amount you’ve earned over the course of six months, prior to filing for Chapter 13.
- Your primary source of income can be the salary you get from employment, hourly wages, bonuses, and tips, but also other sources such as royalties, spousal support, or real estate income (rent).
- Subtract applicable expenses from the previously calculated amount.
- Use the aforementioned IRS guidelines to ensure you have enough funds to support yourself and your dependents.
- The remaining amount is your disposable income
- This number will be used to determine your eligibility to file for Chapter 13 bankruptcy, as well as how much your monthly payments will be.
Who’s the leading Chapter 13 bankruptcy attorney near me in San Diego?
Whether you wish to find out more about your options under Chapter 13 or explore other legal avenues to get yourself debt-free, including the possibility of filing for Chapter 7, Bankruptcy Law Offices of Mark L. Miller are here to offer comprehensive guidance tailored to your unique situation.
With over 25 years of experience on the San Diego legal scene, we’re the prime choice of legal partner to help you regain financial independence. Call now to schedule a free, no-obligation consultation at our offices near Heritage County Park, and ensure you have a team that has your best interests in mind!