In a Chapter 7 bankruptcy filing, a debtor or his attorney must complete a form, which establishes a current monthly income to help determine whether the debtor qualifies for Chapter 7 bankruptcy. The form is often called the “Means Test.”
The current monthly income is calculated using the income received in the six –month period prior to the month in which the case is filed. That six-month total is converted into a yearly income by multiplying the number by two. When the yearly income falls below the state median income for that debtor’s family size, a Chapter 7 case is usually an option. When the yearly income is above the median, the Means Test gets more complicated.
I am often asked by prospective debtors whether there is some way they can file Chapter 7 even when their income is above the state median because they still have expenses that exceed their net income, and they have no money to pay credit cards at the end of the month.
The answer is sometimes. When a debtor is above the median, the longer version of the Means Test must be used. With that version, the debtor starts with a monthly gross income and deducts a series of expenses. Some of the expenses are pre-set by the IRS, and some are set by the county in which the case is filed. Finally, some of the debtor’s actual expenses may be used as well (a mortgage payment, for example, can be used in lieu of the IRS standard if the mortgage is higher than the standard).
After all the allowed expenses/deductions have been made, the resulting number must be negative, zero, or a positive number that is not sufficient to pay back a reasonable portion of the debtor’s unsecured debt over a 60 month period.
Because the Means Test can be complicated (especially when using the longer version), and because it is not always clear to debtors what to count as income and what to count as expenses, it is best to speak with an attorney prior to filing bankruptcy to make sure you qualify for the Chapter you are trying to file under.
For more information or a consultation, please call 661-210-5657, or e-mail mjf4bk@ca.rr.com.