Understanding Bankruptcy Means Test California
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What Is the Bankruptcy Means Test?
Are you facing overwhelming debt and considering Chapter 7 bankruptcy? Then, you should familiarize yourself with the bankruptcy means test.
Introduced by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the means test is a requirement that every debtor, except those exempt, must fulfill to qualify for debt relief under Chapter 7 bankruptcy. It assesses your average monthly income and actual expenses to determine whether you are genuinely unable to pay off your debt.
The following guide will help you understand the means test, the forms you must file, and what you can do if you fail it. If you need to learn more about bankruptcy, the bankruptcy basics guide from Chang & Diamond, APC, can help.
How Does the Bankruptcy Means Test Work?
The first part compares your current monthly income to the average household income in California of a family the same size as yours. You qualify for Chapter 7 bankruptcy if your monthly income is at or below the median income. If you exceed the California median income, the second part of the test comes into play.
The second part of the bankruptcy means test deducts the allowed household expenses from your current income to determine your monthly disposable income. If your disposable income of 60 months is equal to or less than 25% of your unsecured debts, you qualify for Chapter 7 bankruptcy. Therefore, the lower the disposable income, the higher the chances of passing the means test.
Means Test Forms
To take the means test, you must complete and file the following forms:
Form 122A-1: Statement of Your Current Monthly Income
Form 122A-1 determines how your monthly income compares to the California median income for households the same size as yours. For this purpose, you must complete accurate and up-to-date information on your total household income and expenses.
If your income is at or below the state median, you will qualify for bankruptcy relief under Chapter 7 directly. You don’t need to file Form 122A-2.
Form 122A-1Supp: Statement of Exemption from Presumption of Abuse Under § 707(b) (2)
Form 122A-1Supp determines if you are exempt from the means test, regardless of your income. People who may qualify for this exemption are:
Disabled veterans with at least 30% of disability acquired from service and debt primarily incurred during the service period
People whose majority of unsecured debt is not incurred for personal or household purposes
Members of the National Guard and Reserve who have been on active duty for 90 days
If any of these exemptions apply to you, you should file Form 122A-Supp and fill out Part 3 of Form 122A-1 for verification. You don’t need to file Form 122A-2.
Form 122A-2: Chapter 7 Bankruptcy Means Test Calculator
If your monthly income level exceeds the California median income and you don’t qualify for an exemption, you must complete Form 122A-2.
This form calculates your income after deducting living expenses and payment of certain debts. If your disposable income multiplied by 60 is lower than one-quarter of your unsecured debts, you qualify for discharge under Chapter 7.
If your disposable income is high enough to pay your debts, there may be a presumption that you are abusing the system and will not qualify.
Considerations Beyond the Means Test in Bankruptcy Filing
- The duration between bankruptcy petitions: You cannot file for bankruptcy under Chapter 7 within 180 days of your last filing if you willingly missed appearing before the bankruptcy court. This also applies if you did not comply with court orders or withdrew your petition after creditors sought relief from the automatic stay.
- Credit counseling: You must receive credit counseling from an approved agency before filing to qualify for discharge.
- Debt management plan: If, during your credit counseling, you develop a debt repayment plan, you must file it with the court.
- Personal Financial Management Course: Before the court grants you a discharge, you must take a debtor education course and file Form 423 with the court. The form requires details of the course date, provider, and certificate number.
Chapter 13 Bankruptcy as an Alternative to Chapter 7
If you don’t pass the California means test, Chapter 13 bankruptcy may be a viable alternative. Known as the wage earner’s plan, Chapter 13 is designed to help people with a regular income to repay some debts through a debt settlement plan. This plan allows debtors to repay all or most of their debts over three to five years.
Your means test results, namely the disposable income, may be used to determine your repayment plan and monthly payments.
Chapter 13 bankruptcy offers certain advantages over Chapter 7 bankruptcy. For instance, it can allow you to catch up on missed mortgage or car payments and avoid foreclosure or repossession. Chapter 7 bankruptcy, however, can result in the loss of non-exempt assets. Chapter 13 bankruptcy allows you to keep all your property and repay debt only using your disposable income.
Working with a bankruptcy attorney in California will help you understand the best course of action for your specific situation.
How Can a Bankruptcy Attorney Help You?
The means test requires the filing of long and complex forms. If you are unfamiliar with bankruptcy law and not a fan of numbers, you may need the help of a bankruptcy lawyer to ensure the accurate filling out and filing of your means test forms. They can also help you prepare and file the bankruptcy petition and guide you through the process.
A bankruptcy attorney can also help with the following:
- Determine the best chapter of bankruptcy to file under: A bankruptcy lawyer will assess your financial situation and determine if you should file under Chapter 7 or Chapter 13.
- Help you with exemptions: Exemptions allow you to keep certain assets during bankruptcy. An attorney can help you understand which exemptions apply to your case and how to protect your property.
- Negotiate with creditors: A bankruptcy attorney can negotiate with your creditors to reduce or restructure your debt. This can save you thousands of dollars and make it easier to complete your repayment plan.
- Represent you in court: Bankruptcy cases can involve multiple court appearances. An attorney can represent you in court and protect your rights.
- Provide guidance and support: Bankruptcy can be a stressful and overwhelming process. A bankruptcy attorney can provide guidance, support, and advice throughout the process, making it easier to get through this difficult time.
Overall, working with a bankruptcy attorney will help you navigate the means test and bankruptcy process and give you peace of mind, knowing that an experienced professional is handling your case.
Ready to Start Your California Bankruptcy Means Test?
Chang & Diamond, APC, has been helping the Californian community resolve their debt issues through bankruptcy for 25 years. We understand how daunting it can be to do it alone. If you are ready to file bankruptcy, our attorneys can help you choose the right type for your situation and walk you through the process, including the means test calculation.
We can assist you and answer your questions during the weekends and after-hours. Contact us today to schedule a free consultation.