California residents facing bankruptcy may be interested in learning about the bankruptcy means test. This test helps to determine whether an individual who is in debt meets the qualifications to file for Chapter 7 bankruptcy. In times past, it was easier for an individual filing for bankruptcy to meet the criteria because the courts had broader discretion in determining if a person was eligible for bankruptcy.
This changed in 2005 when Congress passed the Bankruptcy Protection Act of 2005. The purpose of this law was to provide consistent standards and serve as a counterbalance to some of the more lenient standards that had been put in place earlier. Now, this means that before filing for bankruptcy, the majority of filers will need to meet the standards laid out in the means test.
The bankruptcy means test does not apply to everyone. For example, a disabled veteran who accumulated debt while on active duty and who has a disability rating of 30 percent or higher may not need to meet the standards laid out in the means test. This is also true of individuals who have debt from operating a business.
There are a number of steps in this test. Step number one is where the debtor’s average monthly income for six months before they filed for bankruptcy is compared to the median family income in their state. If the debtor has income that is at or under the median number for the state, they may meet the qualifications for filing for Chapter 7.
The second step applies to individuals who make more than the state’s median income. They will need to deduct their allowed expenses, standard expenses and actual expenses. Then, it will be determined if they have sufficient income to pay some of their unsecured debt. They may be required to file a Chapter 13 repayment plan as opposed to Chapter 7 bankruptcy.
A bankruptcy attorney may be able to help their client collect the financial documentation needed when filing for bankruptcy. They may be able to help the client evaluate their financial situation and determine if Chapter 7 bankruptcy or Chapter 13 is right for them.