The Means Test is an income qualification tool used to determine if you are allowed to file a Chapter 7 bankruptcy or if you must file a Chapter 13 bankruptcy. Individuals with more than a certain income must file a Chapter 13 bankruptcy. A Means Test can determine who can file for Chapter 7 bankruptcy.
The law now uses a standard mathematical formula to determine whether you can file for Chapter 7 — or, to put it in legal terms, whether filing for Chapter 7 would be an 'abuse' of the bankruptcy system. (Those who fail the means test are left with a Chapter 13 repayment plan as their only bankruptcy option.)
The bankruptcy means test is actually a two-part test and you only need to pass one of them to qualify for Chapter 7.
Test 1 - "Median Income"
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. If it is above the median, you must pass Test 2.
Test 2 - "Disposable Income"
This test deducts expenses from your income to determine how much you can pay your unsecured creditors over the next five years: for example (this example is just an example, each county and state is different);
- If you can pay at least $10,000 ($167 per month), you can't file for Chapter 7.
- If you can pay at least $6,000 ($100 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 $100 per month, you can file for Chapter 7.
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. Depending on which county you live in California, the amounts may change but the method of calculation will not.
In addition, to these standard deductions, you can also deduct the full amount of certain actual expenses such as mortgage and vehicle loan payments.
Are You Ready?
Contact Fong Law Group today for a free consultation at (626) 289-8299, and we will help determine which type of bankruptcy you qualify for.