Income is an important measure to take for determining if you’re insolvent in a Chapter 7, and how much you would need to pay in a Chapter 13. Its flip side is expenses. Income and expenses have to be compared to each other to see what your financial capabilities are, and ultimately to demonstrate the inability to repay your debt through your future income. Your income first has to go to paying what you need to live, and then the question is what may, or may not, be left over to pay creditors.
In late 2005 Congress enacted BAPCPA, which mandated and detailed the use of a “Means Test” for debtors with primarily consumer debt earning over the median income for the state in which they reside. If you’re below the median income you don’t have to take the Means Test at all. Or if you have mostly tax or business debt you don’t have to take it.
The following is a chart of the median incomes for California households as of May 1, 2022. These figures change about quarterly.
|
1 Person |
2 Persons |
3 Persons |
4 Persons |
|
$65,895 |
$87,355 |
$97,092 |
$111,535 |
Even if you’re over the median income and you have mostly consumer debt you might still pass the Means Test. The Means Test is complicated, over 60 lines with sub-calculations and data derived from your schedules, and while you can take it online at various websites, don’t take that as the final word on whether you pass it or not. You need an attorney who does this all the time and has mastered the process to help you plan for and calculate the Means Test to see if you qualify for Chapter 7.
If you have a large mortgage payment like many Californians, even if you’re over the median income, then that payment makes it likely you will pass the Means Test. It is much harder for renters over the median income to pass the Means Test.
If you don’t pass the Means Test, it doesn’t mean you cannot file bankruptcy. It probably means you have to file Chapter 13 instead, or the UST will move the court to dismiss you case under the “presumption of abuse” that failing the means test signifies. If that’s the case, it’s far from the end of the world as you’ll get significant debt relief in that chapter as well. Moreover, there is one more “test” after the Means Test called the “totality of the circumstances” so that even if you pass the Means Test the UST can object to a Chapter 7 filing.
A good attorney can make the difference as to whether you have to file Chapter 7 or 13, depending on your preference of chapter.
For the Means Test, or for a similar calculation done for Chapter 13 cases, the applicable time period in which your income is measured is the six months that elapsed prior to the month in which you file your case. For example, if you file in October, you tally all the income you actually received in the months of April through September. If it is a July filing date it would be the first half of the year, January through June.
If you wanted to file in July, but received a one-time unusual bonus in January that makes you fail the Means Test, then one prudent and perfectly legal thing to do is wait to file in August so that the January payment falls out of the six-month measuring period.
We help you calculate your income, no matter how complex it is for employed individuals. If you run a business or are self-employed, we will rely on your financials you keep for your business. We have auxiliary professionals who can help you do the accounting even if your bookkeeping and accounting is not up to date.
