Law Office of Stephen K. Haynes
Individuals whose debts are primarily consumer debts are subject to a “means test” designed to determine whether a bankruptcy case should be permitted to proceed under Chapter 7.
The first part of the means test looks only at income. It compares the debtor's household income for the six months before bankruptcy to the median income for the state of residence and family size. If household income is less than the median, the means test is satisfied and the debtor can file Chapter 7.
Generally, income for the means test includes wages, salary, and commissions (before deductions for taxes or insurance). If the debtor is a business owner, income also includes the net profits from the business but not net losses.
In California, the median monthly income ranges from $4,565 for one person, to $6,096 for a couple, and to $7,612 for a family of four (as of May 2018).
The second part of the means test looks at household expenses. It compares the debtor's household income for the six months before bankruptcy to household expenses. Many expenses are subject to a cap based on national or regional averages calculated by the IRS. But a few of the most important expenses -- such as monthly payments on a home loan or a car loan -- are based on what the debtor actually pays. If allowable household expenses exceed income, the means test is satisfied and the debtor can file Chapter 7.
The third part of the means test looks at ability to repay creditors. It compares disposable income (income less allowable household expenses) to debts. If income is above the median but only slightly higher than allowable expenses, and the debtor has substantial unsecured debts, it may still be possible to file Chapter 7.
Individuals should discuss the means test with an attorney if (1) household income is close to the median, (2) household income has changed substantially in the last six months or varies substantially from month to month, (3) household income is not just wages or salary, or (4) the third part of the means test might apply.
The means test does not apply to individuals whose debts are primarily non-consumer debts. Most often, these individuals operate a business, have investment real property, or do not own a home.