In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was passed. This act made a number of changes to U.S. bankruptcy, one of the most important of which involves the bankruptcy means test. Today, anyone who files for bankruptcy must first have their financial situation evaluated using an income-based test. The test will determine if a person can file Chapter 7 or Chapter 13 bankruptcy.
The means test was created to limit the use of Chapter 7 bankruptcy to only those who are truly in need and unable to pay their debts. It works by focusing on your monthly income and disposable income.
- Monthly Income – The means test will compare your monthly income to your county’s median monthly income. If your monthly income is less than your county’s median income, you’re automatically eligible to file Chapter 7 bankruptcy. If your monthly income is more, the bankruptcy court will further review your situation and the disposable income you have left after paying monthly expenses. This is done to see if you have the available funds to make payments toward your debt.
- Disposable Income – If the court decides you don’t have enough disposable income to pay your debts through a monthly payment plan, you will be eligible to file Chapter 7 bankruptcy. On the other hand, if you do have enough funds to pay some of your unsecured debts, you may be required to file Chapter 13 bankruptcy.
The means test can be rather complex for above-median individuals; however, it should be noted that such higher income individuals routinely qualify for Chapter 7. It is critical to hire a competent bankruptcy attorney who is highly experienced in working with the means test. At Wadhwani & Shanfeld, our Los Angeles bankruptcy attorneys can help you understand how the means test works and which Chapter of bankruptcy is best for your unique situation.
To learn more about bankruptcy, debt relief, and how our firm can help, contact us today. We serve clients throughout Los Angeles, the San Fernando Valley, and Southern California.