About Bankruptcy

Many people come to me asking about the new bankruptcy laws, and whether it is true that most people may no longer file for bankruptcy. The truth is that nearly all of the people who have come to me still do qualify for chapter 7. The difference between bankruptcy laws prior to October 2005 and bankruptcy laws after October 2005 are that people now have to go through additional hurdles, including the "means test," before they may file their bankruptcy petition.

Under current bankruptcy laws, the "means test" is used to determine whether a person may file a chapter 7 bankruptcy case. The means test takes into consideration your gross income, as well as most of your monthly expenses.

The test only applies to people who have consumer-related debts. Thus, people who mostly have business-related debts, including tax debts, do not have take the means test.

The means test was designed to prevent people with higher incomes from filing for bankruptcy. However, as explained below, in certain circumstances, even people with higher incomes often end up qualifying for chapter 7 anyhow.

The means test consists of 2 steps:

First Step: What is your income?

The first step requires you to evaluate all gross (not net) income that you have received from all sources, including your wages, rental income, retirement income, unemployment income, etc., for the last 6 months. So, for example, if you are considering filing a chapter 7 bankruptcy in July 2009, then you would need to list out, month by month, all income you received from January through June 2009. Add up the total gross income for that time period, divide it by 6 to get a monthly average for those 6 months. Lastly, multiply the monthly average figure by 12 to get your average yearly income. This is the figure you'll use to determine whether you pass the first step of the means test. If you live in California, and if that figure is below the amounts listed below, which are the "median income" levels for Californians according to family size (as of March 15, 2010), then you do pass the first step, and you do not need to proceed to the Second Step:

• 1 person family: $47,969
• 2 person family: $64,647
• 3 person family: $70,638
• 4 person family: $79,194
• each additional person, add $7,500

Now, if your income is above the median family income, proceed with the Second Step.

Second Step: What are your monthly expenses?

The second step permits you to deduct certain monthly expenses. Some of the monthly expenses are based on formulas set by the Internal Revenue Service. And some of the monthly expenses, such as the amount that you pay for your health insurance, out-of-pocket health expenses, child care, life insurance, and your payroll taxes, are also deducted from your monthly income. This step also permits you to deduct the amount that you pay for your home mortgage each month.

It is really only after completing the second step that most people know whether they qualify for chapter 7. If not, it is possible that chapter 13 is still an option for you. It is advisable that you speak with an experienced bankruptcy attorney to help you determine whether you qualify for chapter 7 under the means test.