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June 30,2020

What is the Means Test in a Chapter 7 Bankruptcy Case?

Bankruptcy courts across the U.S. saw nearly 480,000 Chapter 7 cases in 2018 alone. This is compared to fewer than 300,000 Chapter 11 and Chapter 13 cases combined. While Chapter 7 is the most popular type of bankruptcy, not everyone qualifies for it due to their income and history of income. 

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 created new eligibility requirements for Chapter 7 bankruptcy, once of which is passing the “means test.” The means test aims to prevent consumers with too much income from filing for Chapter 7 bankruptcy. Legislators took the stance that if you have the income to make payments to your debts, you should file for Chapter 13 reorganization bankruptcy (which requires a payment plan) instead of receiving a Chapter 7 discharge (which requires no payments).

How the Means Test Works

The means test measures your income against the median income in your state. The Department of Justice reports the median income for different household sizes in each state, and your income cannot exceed the reported amount for the number of people you have in your household. First, our attorneys will review all of your sources of income, which include at least:

  • Wages, bonuses, commissions, tips, and overtime
  • Self-employed income
  • Dividends, interest, and royalties
  • Rental income (net)
  • Retirement and pension income
  • Child or spousal support
  • Spousal income
  • Unemployment benefits
  • Annuity payments
  • State disability insurance

One important note for 2020 is that if you received a stimulus check from the CARES Act due to the COVID-19 economic crisis, it will not be counted as income for the purposes of the means test. If your income is irregular due to commissions or one-time bonuses, you will likely need to use the average of your income over the past six months. 

Once all of your income is added up, if it is less than the median income for your state, you can file for Chapter 7 bankruptcy. If it is higher than the median, this does not mean you are disqualified, but we will need to do some additional calculations. The next step is to determine your average expenses, which can include:

  • Taxes
  • Spousal or child support
  • Insurance premiums
  • Child care costs
  • Utilities
  • Food and clothing
  • Education costs for children (except private school tuition)
  • Mortgage payments
  • Auto loan payments

Once you deduct these expenses from your income, you will then measure that amount against the median income reported by the DOJ. If your net disposable income is less than the median, you will be able to file a Chapter 7 case.

Consult with a California Bankruptcy Lawyer Today

Passing the means test is essential if you want to file under Chapter 7. However, many people make errors in their paperwork that might prevent them from a Chapter 7 case. This can be a complicated process in an already stressful time, and you want the help of a California bankruptcy lawyer from Miranda, Magden & Miranda, LLP. Contact us today.

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