Do I Qualify for Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is perhaps the most powerful form of true debt relief, extinguishing all of the bankruptcy filer’s debt. Despite its many advantages there are also disadvantages and for many Americans, filing Chapter 7 could become an unrealistic solution because of the qualifications for filing Chapter 7. And is Chapter 7 vs Chapter 13 bankruptcy a better solution for you? If it is Chapter 7, how do you find out if you can qualify for Chapter 7 bankruptcy?
Assuming you can afford the costs associated with filing bankruptcy and preps hiring a qualified California bankruptcy attorney, in order to file Chapter 7 bankruptcy you will have to meet one of two criteria. Either your current monthly income will have to be less than or equal to the state’s median income, or you must pass the “means test.”
1. Your Income – California State Median Income
For the purposes of Chapter 7 bankruptcy, your monthly income is defined as the average monthly income you’ve received over the past six months prior to filing bankruptcy. Sources of income could include:
- regular wages plus any tips
- commission or bonuses
- unemployment compensation
- state disability insurance
- pension and retirement income
- any interest, dividends and royalties you receive
- any spousal and/or child support payments you receive
- any net income from rental property you own
In addition, if both you are your spouse are filing, you will need to include both incomes when you are calculating your current monthly income. After you have identified all of your sources of income, simply add up the total income you received from all these sources during the previous six months prior to when you anticipate filing Chapter 7, and divide that number by six to determine your average monthly income. Now multiply that monthly income amount by 12 to determine if your current income falls within the California state median income requirements. In California, the median income for a single earner household is $49,188 and for a two earner household it’s $63,481. If your income is within these limits, you may qualify for Chapter 7 bankruptcy in California.
2. Determination of Ability to Repay – The “Means Test”
If your income does not fall within the required income range, you may still qualify for Chapter 7, provided you can pass the “means test.” The focus of the means test, is not how much income you make, but what your actual disposable income is that matters to the calculation of this test. So how do you determine what your disposable income is? To determine this, the court subtracts specific allowed expenses from your current monthly income such as food and clothing. Because many of these items are based on a national standard, and yet others based on a regional standard, the computations can get quite complex. Based on your disposable income calculations, the higher your disposable income, the less likely it is that you’ll qualify for Chapter 7. In these instances, the court will determine that you have a sufficient disposable income to pay back at minimum, a portion of your debt by using not Chapter 7, but Chapter 13 bankruptcy.
I Don’t Qualify for Chapter 7 – Are There Other Options?
If you do find yourself ineligible for Chapter 7 bankruptcy, then you are likely a good candidate for debt relief through debt settlement. An attorney negotiated debt settlement can eliminate your debt without having to file for bankruptcy. In addition debt settlement is usually quicker and less expensive than filing for Chapter 13 bankruptcy. For more information to see what California debt settlement can do for you, contact us today for a free consultation.