The Means Test

When you're filing for bankruptcy, one of the first decisions you will make with your bankruptcy lawyer is whether to file for Chapter 7 or Chapter 13. Filing Chapter 7 bankruptcy is often preferable, because it will more completely wipe out your debts. However, there is concern over higher-income individuals, who have the ability to repay some of their debts, filing for Chapter 7 simply to avoid paying. The “means test” was developed as a way to determine which individuals have income and assets low enough to justify granting them a Chapter 7 bankruptcy.

How to decide if you can file for Bankruptcy?

It's best not to automatically assume you can't file for Chapter 7 just because you have a regular monthly income. You don't actually have to be destitute in order to be granted a Chapter 7 bankruptcy, and the formula takes into account certain monthly expenses. Having said that, there are procedures everyone must follow in order to determine their eligibility to file for this type of bankruptcy.

1. The first step is to research and find out the median income for your household size and state (in this case, California). Your bankruptcy lawyer will already know this information.
2. If your income falls under this limit, you don't need to do any more calculations. You qualify for Chapter 7 bankruptcy.
3. If your income is above California's median income for your household size, the means test will need to be performed. This is a complex series of calculations which will determine how much disposable income you have left over after paying certain monthly expenses. The amount of your disposable income after applying the means test will determine whether you are eligible for Chapter 7.

Aside from your state's median income, other factors may play into your means test calculations. Different counties and metropolitan areas often allow different amounts for expenses like housing, transportation, and basic necessities. For example, those who live in an area with a high cost of living may be able to deduct a higher amount for rent.

The means test can be complex, so if you don't automatically qualify for Chapter 7 bankruptcy on the basis of your income, it's best to consult a bankruptcy lawyer. He or she will already be familiar with the individual allowances of your area, and can help you deduct all of the expenses to which you are entitled. If you aren't sure that you will qualify for Chapter 7 bankruptcy, it pays to have this consultation, since in the long run Chapter 7 is usually a much better financial arrangement for you.