The vast majority of people that come into the office for a bankruptcy consultation are struggling with making their basic necessity payments. The typical person usually has not paid a credit card for months or even years, and their income is about equal to their basic necessities. However, some people come in with different financial situations.
In 2005, Congress implemented additional rules that limit individuals and couples that make higher income (as determined under the Bankruptcy Code) from qualifying for the benefits of Chapter 7. The reason for this is that the thought is that if you have an ability to pay off a portion of your debts, you should do that, and that is what your creditors deserve (according to Congress).
The Chapter 7 Means Test determines the "disposable income" for debtors. This test is quite complex, and the trustees reviewing cases under Chapter 7 review each case to make sure that debtors, in fact, qualify for the relief they are requesting.
The starting point for the Means Test is the debtor's gross income. This is the total amount of income before taxes, and any deductions, even if that income is not subject to taxes (for example 401(k) deductions). If a married person is filing by himself/herself, the non-filing spouse's income must also be included (although certain deductions are available).
The next step is to see whether that income is above the median income for the debtor's state. For example, in California, the median income for a single person is currently $47,683. For two (2) people, that income goes to $61,539. If your income falls above the median income based on your household size, you have to go through further tests. The keys on these tests is to determine whether a debtor has an ability to pay back a portion of debt.
If the income is higher that the median, a potential Chapter 7 debtor must go through a deduction process to show the court, the trustee, and the debtor's creditors that the debtor does not have any sufficient disposable income. Some of these deductions include national deductions for (a) living expenses (food, clothing, household supplies, personal care, and miscellaneous), and (b) health care expenses (outside of health care insurance). Other deducutions include income taxes (not real property taxes), term life insurance, child care (baby-sitting, day care, nursery and preschool), and regular charitable contributions.
To determine whether you qualify for Chapter 7 bankruptcy, contact the Henshaw Law Office today at (408) 533-1075.
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