Bankruptcy Means Test
The Means Test was devised to limit the use of Chapter 7 bankruptcy to those individuals who truly cannot afford to pay their debt. Only filers with predominantly consumer debts, not business related debts, need to take the Means Test.
There is a safe harbor rule that exempts certain individuals from the Means Test eligibility requirement. This includes disabled veterans, reservists, and National Guard members.
The current median income for California ranges between $47,969 for individuals, $64,647 for a family of two, $70,638 for a family of three, and $79,194 for a family of four. If your income is more than the median, the Means Test is applied. If you fail the Means Test, you are not eligible to file under Chapter 7. For an online Means Test Calculator, see our Additional Links page in our Resources section. Seek out competent legal assistance from a bankruptcy attorney to accurately calculate your income eligibility to file under Chapter 7. This may usually be determined during a free one hour consultation.
Test 1: Median Income
Current monthly income for the past 6 months is averaged then multiplied by 12 and compared to the median income of a like-sized family in California. If your income is below the median for a like sized family, you have passed the means test. If it is above the median, you must pass Test 2: Disposible Income.
Current monthly income is any income received by you. You must include any of the examples listed below:
- employment income like wages, tips, and bonuses
- gross business income
- interest, dividends, and royalties
- spousal or child support
- rental property income
- pension and retirement income
- unemployment benefits
- workers compensation insurance
- social security disability benefits
- annuity payments
- lump-sum, windfall payments
Test 2: Disposible Income
This test is more involved and is calculated by filling out Form 22A. The form basically deducts your expenses from your income to determine how much you can pay towards your unsecured debts over a period of five years. If you can pay more than 25% of your unsecured debts you will not qualify for a Chapter 7.
Debtors are allowed deductions for certain living expenses, which may be more or less than your actual monthly expenses. These deductions include:
- Out-of-pocket health care expenses
- Food, clothing, housekeeping supplies, personal care, & misc expenses
- Transportation expenses
- Housing & utilities
- Child care
- Court ordered payments including alimony, support, or restitution
- Support for the elderly, handicapped, or invalids
- Education required for employment
- Education for special needs children if not met by public school system
- Necessary medical & dental expenses
- Involuntary deductions from wages including union dues, uniforms, & 401(k) loan repayments
- Term life premiums
- Taxes
- Optional telephone services including call waiting, long distance, and extraordinary cell phone expenses
- Internet service
- Secured debt payments including those paid in a Chapter 13 plan
- Chapter 13 administrative expenses
- Charitable contributions
To pass the second phase of the means test you must satisfy one of the following conditions:
1) Your current monthly income less allowed expense deductions is equal to or less than 0; or
2) Your current monthly income less allowed expense deductions multiplied by 60 is the lesser of $10,950 or 25% of your non-priority unsecured debt as long as that 25% is at least $6,575.
NEXT --> Exemptions