What kind of bankruptcy do you qualify for?
| California Median Income
If your average monthly income for the past six months is below the state median for your size household, you meet the requirements of the “means test” (section 707(b)(2) of the bankruptcy code) to qualify for Chapter 7 Bankruptcy.
|Median Income standards effective Nov 1, 2012 through March 31, 2013||Median Income standards effective Apr 1, 2013|
|Persons in Household|
|Source: U.S. Trustee, U.S. Department of Justice (for bankruptcy cases filed on or after May 1, 2013)
Note. The means test is but one of several hoops you must jump through. Even if your income is low, a judge can prevent you from filing Chapter 7 if it appears that you have enough income to repay a substantial portion of your debts in a 3-year Chapter 13 plan.
There are two main types of bankruptcies for consumers:
Chapter 7 allows you to eliminate most unsecured debts in a matter of months in return for giving up all “non-exempt” property — if you have any.
Most people who file for Chapter 7, have no available non-exempt property or equity. Whatever they still own by the time they file is either protected by exemption laws, or pledged to a secured creditor as collateral for a debt, and therefore not available to pay off unsecured creditors.
These are known as “no asset” bankruptcies, and most Chapter 7s are of this type.
Chapter 13 takes 3 to 5 years. Instead of giving up property, you repay a portion of your debts and live within a strict budget that is monitored closely by the bankruptcy court trustee. If you can’t make the required monthly payments, your Chapter 13 bankruptcy fails and your debts will remain (unless you convert to a Chapter 7 bankruptcy).
Chapter 13 is commonly used by people who are behind on secured debt payments (e.g., mortgages) and want to propose a Chapter 13 plan to catch up on these payments over time.
Under the new bankruptcy law, which took effect in October 2005, a mathematical formula called the “means test” establishes an initial determination of the kind of bankruptcy you qualify for: Chapter 7, Chapter 13, or either. This formula takes into account:
- your monthly income
- the amount and kind of your debts, and
- other aspects of your financial situation.
If your annual income is less than the California median income for your household size, then you can file for Chapter 7 or Chapter 13, (assuming you meet other qualifications). If your income is higher than the state median, you must first complete a long list of expense deductions to estimate what your ‘disposable income’ will be over the next five years. The result of this calculation determines whether you can file for Chapter 7, or are left with Chapter 13 as your only option.