Chapter 7 Means Test Explanation
The means test is an income test you must pass to file for bankruptcy. It's a standardized form that you fill out, and it will calculate your average monthly income to find the annual income.
The test considers your entire household income, even if your spouse isn't filing with you (unless you are legally separated). They get those figures from the Census Bureau to see how your income and others in California compare.
To calculate your average monthly income, you fill in the monthly income you earned from all sources six months before filing bankruptcy. For example, if you plan on filing on September 15th, look at the period from March 1st to August 31st. If your income varied during those six months, add them and divide them by six. You would only list it once if you and your spouse earn from a rental property. And if you don't have anything to report for a particular line, write $0.
You should check out this average income calculator if your income fluctuates. It's specifically designed for the California means test, and it'll give you an estimate of your average monthly income.
Let's dive into how they calculate the means test in California for bankruptcy cases filed in 2024.
California Chapter 7 Bankruptcy Income Limit
We'll start with some information about household income levels for bankruptcy cases in California. We want to remind you that these figures are specifically for cases filed on or after November 1st, 2024. The income levels are updated typically every six months or so. Make sure you double-check the most up-to-date information.
| # of People | Annual Income |
|---|
| 1 | $74,007 |
| 2 | $97,073 |
| 3 | $109,312 |
| 4 | $127,096 |
| 5 | $136,996 |
| 6 | $146,896 |
| 7 | $156,796 |
| 8 | $166,696 |
| 9 | $176,596 |
But what if you have an even larger household? You will add $9,900 to the annual income limit for each additional family member beyond nine.
What Is Considered Income?
Not all income would be included in the test. For example, disability and social security income aren't considered.
In California, some other types of income are included in the bankruptcy means test, such as:
- Salaried income
- Spousal income: If you’re in a joint case or not legally separated, your spouse’s income is fair game.
- Hourly and overtime income
- 1099 Income: Your income is included if you’re an Uber or Lyft driver.
- Net Rental Income: If you’re earning money from renting out property, that’s in too.
- California government income
- Child support and Alimony
- Dividend, Interest, and Royalties: Money from investments and creative endeavors
- Pension and Retirement Income
- Net business income
- Annuity payments
- Unemployment compensation
- Worker’s Compensation Benefits
What Is Considered In Household Size?
Generally, anyone who lives in your home regularly is considered part of your household. However, financial dependence also plays a role. For example, if you have children living away from home for college, yet you still support them financially, they may still be considered part of your family.
Anyone who lives within your home and who you support, depend on, or are connected with financially counts as a household member. Generally, it usually goes by the saying “heads on beds,” sometimes, the attorney may look at who is filed within your taxes, so be sure to seek council if you are unsure.
Timeframe of Filing Another Bankruptcy
If you filed for bankruptcy in the past and are looking to file again, be sure that the appropriate amount of time has passed. Before you file another chapter of bankruptcy, you may have to wait a few years. Check out the timeframe below:
Chapter Filed Earlier, Chapter to be Filed, Time Restriction
- Chapter 13, Chapter 13, 2 years between filing
- Chapter 7, Chapter 13, 4 years between filing
- Chapter 13, Chapter 7, 6 years between filing
- Chapter 7, Chapter 7, 8 years between filing
California Above Median Bankruptcy Means Test
If you’ve looked at the calculator above, and your income is above the household income level, there’s a chance you might qualify for bankruptcy based on the following two means test forms.
The first form is called the “Statement of Exemption from Presumption of Abuse Under §707(b)(2)”. It’s a way of saying you might still qualify if you can prove you’re not trying to take advantage of the bankruptcy system. The second form is the “Chapter 7 Means Test Calculation”. The calculator allows you to deduct your allowable monthly expenses from your current income to determine your disposable income. These expenses are a mix of national and California costs.
Disposable income is the money you have left after paying your expenses, and it’s what you can use to repay your debts. If your disposable income falls below a certain amount, you could still qualify for Chapter 7 bankruptcy.
You can use our California Chapter 7 Bankruptcy calculator below to estimate qualifications, costs, and pros and cons.
Allowable deductible expenses
You may also be wondering what expenses you can deduct. Here are some that may be considered:
- First, you can deduct mandatory employment expenses like union dues, retirement plans, and work uniforms.
- Health and disability insurance premiums
- Don't forget about income taxes
- Child care expenses
- Term life insurance premiums
- Secured debt payments for your car or home
- Alimony and child support payments
- Charitable contributions
You can also deduct other expenses for exceptional circumstances. The maximum amounts allowed for these expenses depend on the number of people in your household. Check out the current national standards for the details.
- Housekeeping supplies
- Clothing expenses
- Food
- Personal care services and products
- Housing and utility expenses
- Transportation expenses
- Out-of-pocket healthcare expenses
If you have more questions, contacting a local bankruptcy attorney in California is always a good idea. They can give you a free evaluation and help you navigate the process.
What Happens If You Fail the Bankruptcy Means Test?
If you do not initially pass the bankruptcy means test, there are still some avenues you can explore. For instance, you can file for Chapter 13 bankruptcy, debt settlement, or debt management.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy in California is like a wage earner's plan. You make payments to repay some of your unsecured debts over time, so you will be set on a repayment plan where you can pay either none, some, or all of the debt back. Your non-exempt equity and disposable income determines the payment plan. The good news is that you can usually keep your assets, and there's no need to meet any specific qualifications as long as your debt falls within certain limits. It stays on your credit report for seven years instead of ten, like Chapter 7. The payment plan can last 36 or 60 months, but your plan might be shorter if you're in a 100% Chapter 13.
However, with Chapter 13, failing the means test means you do not have enough disposable income to pay at the end of each month to the bankruptcy trustee. Because of this, the court cannot grant you a Chapter 13 bankruptcy, which may require sizable monthly payments.
Now, why would someone choose Chapter 13 over Chapter 7 bankruptcy? One reason is if you have more equity than what's allowed under the California bankruptcy exemption. It will enable you to protect your assets while dealing with your debts. Another reason is that it can help with foreclosures.
Debt Settlement
Debt settlement is when you or a company negotiate with your creditors to reduce the amount of debt you owe. It's a program that typically lasts 12 to 60 months. During this time, you'll be on a payment plan, chipping away at your reduced debt bit by bit. For example, if you had $50,000 in debt, debt settlement might bring that down to a more manageable $25,000.
When choosing a debt settlement company, you have to be careful. Some companies charge around 25% or more of your enrolled debt. So, make sure you do your research before diving in. You can check out the Consumer Finance Protection Bureau for the latest information on debt settlement programs.
Luckily, there are resources to help you make an informed decision. The Consumer Finance Protection Bureau has all the up-to-date information on debt settlement programs. And if you want some personalized advice, feel free to contact us.
Many of these firms operate nationally, so you can cast your net wide and find the perfect fit, no matter where you are in California or beyond.
Cons of Debt Settlement
This option has some potential negatives, namely that you tend to have to miss a few payments for your creditors to be willing to negotiate. Not only does this put you at risk of being sued by the creditor, but it also impacts your credit score for up to seven years.
Additionally, there is no legal protection, so if a creditor does not agree to a negotiated payment plan, they may sue you. If a creditor sues you, that may go on your credit report.
There are also potential taxes on the forgiven debt. Whatever debt was forgiven in the settlement may be taxable, and you have to report the canceled debt on your tax return for the year the debt was canceled. Generally, you may have to report any taxable amount of canceled debt as income. The creditor may send you a 1099-C form you would have to fill out.
Debt Management
Debt management, also known as credit counseling, is a way to negotiate with your creditors to lower the interest rate on your debt. Let's say you're stuck with a 22% interest rate on your debts. A debt management company can negotiate with your creditors, lowering that interest rate to a much more manageable 9%.
Most debt management companies are non-profits and help get interest down on credit card debt, but when it comes to unsecured personal loans, they might be unable to help. You'll typically be put on a payment plan when you sign up for a debt management program. This plan can last anywhere from 36 to 60 months.
The pro of this program is that it may allow you to pay into the principal rather than the increasing interest. So, if you have credit cards with high interest rates and want a less aggressive option, this may be something to look into.
The downside to this option is that you still have to pay off everything you owe, so it may be a more expensive option. The good news is that it won't hurt your credit as much as some of the other options may. However, the accounts in the program will close, which may take a small hit on your credit.
Many debt management firms are national, so you don't have to stress about finding a local one if you live in California.
Summary
Understanding bankruptcy means tests and California Chapter 7 Income Limits can be overwhelming. Many folks prefer Chapter 7 bankruptcy because it's often cheaper and faster than other options.
So, let's break it down. Here's how the Chapter 7 bankruptcy means test and income limit work in California:
- The first part compares your household income to the California income limit.
- Suppose your household makes more than the income limit. You may still qualify for Chapter 7 bankruptcy in California based on your expenses and deductions.
- If you fail the means test, other options, like Chapter 13 bankruptcy, debt settlement, and debt management, are available.
Hopefully, this article has shed some light on the subject. If you want to know if you qualify for Chapter 7 bankruptcy in California, give the California bankruptcy means test calculator below a try.
