Congress made changes to the Bankruptcy Code in 2005, including implementing the means test. The means test is used to determine whether you are eligible to file for Chapter 7 bankruptcy. The means test was introduced in response to perceived abuse by individuals filing for bankruptcy who may have been able to afford the repayment of their debts without filing for bankruptcy. Now, the bankruptcy court takes a close look at your income and the amount of disposable income you have remaining each month after you pay reasonable expenses.
If your income is less than the median income for the state of California, you are eligible to file for Chapter 7 bankruptcy. For purposes of the means test, median income is defined by the state where you live and the number of people in your household. To calculate your income, include all income you earned from all sources for the last six months. This may include funds earned through wages, a retirement account or unemployment benefits. Next, divide the income by six to obtain an average amount for the last six months. Then, multiply this number by 12 to determine your average yearly income. If your income is more than the median amount, you must complete another step to determine your eligibility to file for Chapter 7 bankruptcy.
If you earn more than the median income for the state of California, you may still qualify to file for Chapter 7 bankruptcy by deducting living expenses from your income. The Internal Revenue Service created a list of eligible deductions that are specific to each state. For example, your rent or mortgage payment can be deducted as a living expense. If, after deducting your living expenses, your income is still more than the maximum income in California based upon your family size or your net monthly income over five years is greater than $11,725 or a certain percentage of your debt, you are not eligible to file for Chapter 7 bankruptcy.
If you do not qualify for Chapter 7 bankruptcy because you fail the means test, you may be eligible to file for Chapter 13 bankruptcy. In contrast to Chapter 7, filing for Chapter 13 bankruptcy requires you to create and complete a repayment plan. The repayment plan may take from three to five years to complete, and should be feasible given your monthly income and expenses. At the end of the repayment plan, your remaining debts will be discharged.