One of the biggest changes brought about by the New Bankruptcy Law, was the creation of the Means Test, an income-analysis test that you must pass before you can file for Chapter 7 relief. The test compares your income to the median family income for a household of your size. Median income is determined according to your state. If you live in San Diego or anywhere else in California, the median family income applied is the California median income.
If you are below the median, you automatically pass. If you are over the median income threshold, you must complete a much longer version of the Means Test, which involves an 8-page formula, to see if you can still pass.
If, ultimately, you can pass, then you can file under Chapter 7. If you cannot pass, then your bankruptcy attorney will recommend that you file repayment bankruptcy, such as a Chapter 13.
Once you file a repayment bankruptcy, such as Chapter 13, at the advice of your lawyer, the Means Test is still applied, but not to see if you pass and can qualify to file. Rather, the test is applied, in a slightly different way, to determine how much, if any, of your unsecured debt you need to repay in your Chapter 13 case.
How the Means Test Works
More and more consumers these days are becoming familiar with bankruptcy and they are calling bankruptcy lawyers asking if they pass the Means Test. Passing can be very simple, or it can involve an extremely complex set of calculations. It all depends upon your income level when compared to the median family income for a household of your size.
While there is no substitute for having an experienced San Diego bankruptcy attorney perform a thorough Means Test analysis, here is a brief overview of what the Means Test entails:
1. Six Month Period. First, you must determine the applicable six month Means Test period, which is the past six full calendar months, not including the current month. For example, if it is now December 10, 2010, the applicable six month period would be June 1, 2010 – November 30, 2010.
2. Your Gross Income. Next, you add up how much gross income (income before taxes) you have made during the applicable six month period. Count only the money that you actually received during the six month period, not money that you earned but have not yet received. This will be your total six month income.
3. Annualize Your Income. Then turn your total six month income into an annualized (yearly) figure by multiplying the figure by two. This will be your total annual income.
4. Spouse’s Gross Income. If you are married and living together with your spouse (husband or wife), repeat steps 2 and 3.
5. Total Household Income. Add your total income (determined under steps 2 and 3) and your wife’s total annual income (determined under step 4). This will result in your total household income.
6. Household Size. Determine your household size, which means you, your spouse, and any other dependents living with you.
7. Your State’s Median Income. Determine what your state’s median family income is for a household of your size by checking the Census Bureau’s current median family income for a household of your size. If you live in San Diego County, apply the California median income, which your bankruptcy attorney will have at his or her fingertips.
8. Under Median. Compare your total household income (determined under step 5) with the median family income for a household of your size. If you are under the median income (more precisely, less than or equal to the median income), you pass.
9. Over Median. If you are over the median income, you will have to complete detailed calculations using an 8-page federal bankruptcy form that determines whether you pass. This absolutely should always be performed by a lawyer.
Always Talk To a Lawyer
There are nuances and exceptions to the Means Test and accordingly the above-listed steps, as outlined, will not be applied in every case. As stated above, you cannot rely on following a set of steps to determine if you pass. You should always consult with a lawyer to review and discuss your situation.
Even if you think you don’t pass, an experienced San Diego bankruptcy lawyer who has a solid command of how to pass the Means Test may be able to help you pass the bankruptcy Means Test.