In 2005, the Bankruptcy Code was amended to establish a "Means Test." In general, the Means Test will determine if a person can file for Chapter 7 or must file for Chapter 13.
The initial question for a client who contemplates Chapter 7 is whether his or her current monthly income (defined in Section 101 of the Bankruptcy Code as gross income from the previous 6 months prior to filing) is equal to or below the median income of the state where that person is located. (Click here for the median income of California). The median income figure lists income based upon the number of members of the individual's household.
A. If current monthly income is equal to or below the state median income, then the client may file a Chapter 7 bankruptcy or Chapter 13.
B. If current monthly income exceeds the state median income, then the net income of the debtor is calculated (based upon the debtor's current monthly income less standard expenses) and multiplied by 60.
C. If net income is $10,000 or more, that individual must file a Chapter 13 (60-month payment plan).
D. If net income amounts to more than 25% of the debtor's general unsecured debts, then the individual must file for Chapter 13 (60 month payment plan).
E. If net income is less than 25% of the debtor's general unsecured debts, then that person may file for either Chapter 7 or Chapter 13.
F. If net income is $6,000 or less, then the debtor may file for either Chapter 7 or Chapter 13.