Most consumer debtors who file for bankruptcy generally prefer to do so under Chapter 7 as it allows them to totally wipe out all their debts right away. Chapter 13, on the other hand, generally requires a debtor to pay their debts (or a portion of it) over a 5 year period. Hence, given the choice, chapter 7 would be a more beneficial solution to most consumer debtors as all debts are wiped out now and the debtor can start with a clean slate right away ….. rather than 5 years from now.
To qualify for a chapter 7 bankruptcy, however, a debtor must first pass the “means test”. The means test is a formula that is designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. These higher income debtors may use Chapter 13 to repay a portion of their debts, but may not use chapter 7 to wipe out all their debts.
The “means test” requires debtors to fill up a bankruptcy form showing their monthly income and expenses. A debtor enters his monthly income and expenses on this form and then makes calculations based on the information entered. Many of the information needed to complete this form comes from the debtor himself. However, other information comes from the Census Bureau and the Internal Revenue Service (IRS).
If a debtor’s average income for the past 6 months is below the State’s median family income, then a debtor automatically passes the means test and would be qualified to file for Chapter 7 bankruptcy. The median income is provided by the Census Bureau and is updated periodically. In California, for example, the median family income for a single person is $47,969; for a 2-person family it is $64,647; for a 3-person family it is $70,638; while for a 4-person family it is $79,194. Most consumer debtors in financial hardship who have been laid off from work, or have suffered reduced working hours, for example, would have no trouble meeting the median income threshold to qualify for Chapter 7.
If a consumer debtor, however, has an income that is above the median, then computations get more complicated. It then has to be determined whether the debtor has enough income left over after paying their “allowed” monthly expenses. The debtor may, or may not pass, the “means test” depending on how much income they have left over after paying for the “allowed” monthly expenses. It is not easy to make this determination because median income levels vary by State and by household size. Also, each county and metropolitan region has different “allowed” amounts for different categories of expenses such as basic necessities, housing and transportation. Luckily, there are software programs and online calculators to help with these calculations.
Pass the “means test” and a consumer debtor qualifies to file for Chapter 7 bankruptcy. Fail and the option is limited to filing for Chapter 13.
(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old. Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com
