Qualifying for Chapter 7
is not about magically manipulating the numbers, it’s about proving the numbers as they are and if they are good enough to prove that you qualify for a chapter 7 under the Means Test, then you get to do it.
You may want to consider also, Why File Bankruptcy at All?
How the means test is done can mean a lot to your future. It does have to be done right. If done wrong, you end up being told that you must do a chapter 13 bankruptcy. The problem is this: If you were supposed to pass the Means Test and qualify for a chapter 7, you’ve gotten yourself saddled with a payment plan that you can’t afford to pay.
Because you MUST also qualify for the chapter 13, what are you going to give up paying in order to “qualify” for the chapter 13? Health insurance or tithing, perhaps your children’s tuition? Called Feasibility, chapter 13’s qualification test, tests exactly what it sounds like it tests, can you afford the the chapter 13 payment?
If you can’t afford the payment, then your case will be dismissed from the 13 for not being able to pay after being sent into a chapter 13 because you supposedly could afford to pay.
The Bankruptcy Means Test
This is the Chapter 7 Qualification Test. However, if you do not qualify for a 7, it is also used to determine the amount of your chapter 13 plan payment. Additionally, it determines the duration of you chapter 13 plan. If your income is above the median income your chapter 13 payment plan must last for 5 years. If below then only 3 years. You can always file a chapter 13 which is often a much better idea than a debt consolidation. A chapter 13 is a type of debt consolidation however, you as the consumer have the upper hand. You have the power.
They start with your gross income which is calculated by adding up all of your gross income from all sources during the six months which ended prior to the month in which you file your case. So, if you filed in January, the income that would examined would be anything you received from any source from July 1st through December 31st.
This means all the income actually received. If your pay period ended on December 30th but the check was received on January 3rd, then it’s not counted in your Means Test calculation. If the pay period ended June 30th and you got the check on July 3rd, then it is counted. So, it evens out.
Social security is not counted in your Means Test, however, it will still be counted in your income and expenses. Clients who pass the means test without their social security may have a dickens of time qualifying for a chapter 7 once the income goes back into their budget.
If your budget is $500 negative if you’re paying your debts but is $500 positive without the debts, chances are, you should be filing a chapter 13 and using the extra $500 to pay a payment plan that actually works in your budget.
However, if you currently have no car insurance, no life insurance, no health insurance and no renters insurance, then you may want to take care of those things before you file your case. Face it, your chapter 13 bankruptcy won’t even be allowed to move forward without the car insurance.
We know from sad experience that life without car insurance is not worth the risk and the debts created when you have an accident without it, could dwarf the financial problems you have right now.
Okay, the income is the starting place, we then start deducting your expenses, such as payroll tax deductions, (not the 401k or nor 401k loans) and anything else that comes out of your pay that can be counted such as insurances and child or spousal support if they apply. Then your regular expenses are deducted from your net income but not necessarily your actual expenses, for some expenses we use the Internal Revenue’s estimate of what your expenses should be for a family your size in your area. Oddly while not generous, most of the expenses estimated by the IRS are pretty reasonable.
For instance, if your family has 4 people and you live in Temecula, the IRS estimates that your rent is $2077 at this writing. However, if your mortgage is $2600/mo, you would be allowed to use the $2600 actual expense for your housing allowance.
If you pay a regular contribution to a charity, such as a church or the Red Cross, or cancer research, or a local food bank, you can be allowed to continue paying it. Even if you recently came to an understanding or had some epiphany that you should pay regularly to charity, such as a religious conversion, then you can be allowed to continue that payment when you file. However, preferably you can prove a track record. Even though the code says that they cannot require it to be proved, in practical terms, you have to be able to prove what your disposable income is and so you’ll have to be able to prove it anyway. Many attorneys don’t pay tithing, and so forget to ask you if you do.
Nothing in this article may be considered legal advice, it is for entertainment and medical purposes only. If you use it as legal advice, then I am not responsible for the harm that you do to yourself. It’s nothing but codswallop and drivel, and if you decide to rely on it, then may your bankruptcy judge have mercy on your soul. Additionally, you are not my client unless you have signed the proper retainers. I am licensed only in California.
The Means Test is not about magically manipulating the numbers, it’s about proving the numbers as they are and if they are good enough to prove that you qualify for a chapter 7 under the Means Test, then you get to do it.