The Bankruptcy Means Test of Gross Income for Chapter 7 and 13 in Los Angeles
Since introduced in the 2005 amendments to The Bankruptcy Code, the bankruptcy means test has become somewhat of a hurdle to eligibility. It is also misunderstood by many.
In Chapter 7 cases, it is one of a couple of eligibility tests looked at by the bankruptcy court and Trustees. But it is not an automatic “pass” or “fail” situation.
A skilled bankruptcy attorney can often get relief under Chapter 7 for clients who don’t actually “pass” the means test. But completing the means test properly requires specialized knowledge of all its elements and the underlying law.
In addition to the means test in Chapter 7, courts also examine current budget of those filing bankruptcy. This is your net income minus necessary living expenses. If that amount shows a significant ability to pay something to creditors, it is likely there will be a Motion to Dismiss the Chapter 7 case even if the means test is satisfied.
The actual test elements are discussed below. If you are in need of assistance then contact our office to speak with a Los Angeles lawyer.
How A Los Angeles Bankruptcy Attorney Does the Means Test Calculations in Chapter 7
The first step is to determine if the income of the party filing the bankruptcy is above the median income level for that state, given the household size, and for the relevant period. The median income is adjusted a couple times a year and is determined by the U.S. Census.
The Bankruptcy Code gives the definition of “current monthly income.”
It instructs us to look at the GROSS household income from ALL sources DERIVED (which translates to “received”) in the six calendar months prior to the month in which the case is filed.
If that figure is below the median income for the location and household size of the particular debtor, then one hurdle has been cleared but, as discussed below, that doesn’t necessarily mean your Chapter 7 is going to survive.
If that figure is above the median income, the actual means test must be done to determine whether a “presumption of abuse” arises, which means that, absent special circumstances, relief under Chapter 7 may not be possible (but Chapter 13 or Chapter 11 might be feasible).
The means test calculations are also used in Chapter 13 cases to determine how much the monthly payment is supposed to be (Disposable Monthly Income), although there are additional expenses allowed in Chapter 13 calculations, not allowed in Chapter 7. It is also used to determine the applicable commitment period for the repayment Plan. If the debtor is above the median income for the 6-month period, the plan can be 36 months; if above median, it must be 60 months.
The means test uses a complex formula that takes the gross income for the 6 month period above, and then subtracts out only certain allowed IRS-budgeted expenses items, ongoing secured debt obligations, and some other allowed expenses. A number is then reached and depending on what that number is, a “presumption of abuse” may or may not arise if a Chapter 7 case is filed.
If a Presumption of Abuse arises, you can still proceed with the Chapter 7 case but you may have to defend a Motion to Dismiss filed by the Office of the United States Trustee.
But depending on the reasons for the presumption of abuse arising, it is possible to prevent a Motion to Dismiss from being filed. A bankruptcy attorney with experience can sometimes get a discharge of debts for clients in Chapter 7 even where the means test presumption of abuse arose.
Los Angeles Bankruptcy Attorney Assisting with Means Test Issues
I understand how difficult it is for many to even consider bankruptcy. And the rules and regulations can be overwhelming to a non-bankruptcy attorney.
I have been making the bankruptcy process as smooth as possible for my clients since 1991. Open communication is a hallmark of my representation and I promptly respond to client questions. All work is done by me, a bankruptcy lawyer, in my Burbank, Los Angeles office. No paralegals or assistants.
Bankruptcy cases are only filed by our office after weighing all alternatives and analysis of the pros and cons of filing.
Our firm serves many cities and counties in California, including counties of Los Angeles, Orange, Santa Barbara, Riverside, San Bernardino, Ventura, San Luis Obispo, and cities including Burbank, Glendale, Sylmar, Panorama City, Simi Valley, San Fernando Valley, Irvine, Santa Clarita, Oxnard, Huntington Beach, Ontario, Rancho Cucamonga, Corona, Torrance, Agoura, Long Beach, San Fernando, Van Nuys, Sherman Oaks, North Hollywood, Anaheim, Hollywood, Riverside, San Bernardino, Lancaster, Palmdale, Pasadena, and many more.
Is Income For The Means Test Calculated Using Gross Or Net Median Income?
The “Current Monthly Income” used in the means test analysis is defined to use gross income from ALL sources derived in the 6 calendar months prior to the bankruptcy case filing. That amount is compared to the median income level for the location and household size of the debtor filing bankruptcy. If it is below that number, no further analysis is needed. If above, then the means test needs to be done.