Qualifications for Bankruptcy in California
For the most part, the bankruptcy code is uniform across the country. Certain elements depend on local standards, particularly the qualifications for filing. Individuals can file for bankruptcy under Chapter 7 or Chapter 13. Bankruptcy liquidation, which occurs under Chapter 7, has a strict means test based on median income in the state that must be passed to qualify. Similarly, to qualify for Chapter 13, a debtor must have sufficient disposable income remaining each month after certain local expense deductions. You generally have to be a resident of California for 91 out of the last 180 days to file in their districts.
Other People Are Reading
-
Average Income
-
For purposes of assessing a debtor's income level, the bankruptcy system uses an average of their net income over the three immediately preceding months. This figure will be used directly in the qualifications for Chapter 13. However, for the Chapter 7 means test, an annualized figure must be used. Therefore, to find the annualized average income for comparison in the means test, you must add your net income from all sources for the three complete months immediately before your filing, divide by three and multiply by 12.
Median Family Income by Family Size
-
The Chapter 7 means test consists of a comparison of the debtor's average annualized income to the state median family income by family size. This is data comes from the U.S. Census Bureau and is updated annually (see Resources). In California, for 2009, the median income for a single wage earner was $49,182. For a family of two, the median income was $65,097. For three it was $70,684, and for four, $79,971. If your household has more than four members, add $6,900 for each additional individual after four. If your average income is less than the median income for your household, you pass the means test and can file Chapter 7.
-
Disposable Income
-
But, if a debtor doesn't pass the means test, they must still meet the qualifications for Chapter 13 or else be forced to file Chapter 7 anyway. The Chapter 13 test is designed to determine whether the debtor can make substantial repayment of debts over the course of five years in 60 monthly installments. The test hinges on the debtor's disposable income, which is defined as the average of the past three month's net income minus certain standard expense deductions.
Local Standards
-
The Internal Revenue Service maintains a list of national, regional, and local standards (see Resources). For example, the allowable housing and utilities deduction for a family of four in Los Angeles county is $2,441 (in 2009). The debtor can subtract the lessor of actual expenses or the maximum allowance from monthly income. What remains is disposable income, and can be used to fulfill a Chapter 13 repayment plan. But, if the disposable income is less than 25 percent of the debtor's nonpriority debts, Chapter 7 is the only option.
Expert Insight
-
One of the trickier aspects of calculating disposable income for Chapter 13 bankruptcy has been claiming the expense deduction for transportation. Generally the deduction include ownership costs, like a monthly car payment, as well as operating costs, like gas and maintenance. If the car is owned outright and there are no ownership costs, the IRS states only the operating costs can be claimed. The U.S. Circuit Courts have been split on this issue, however, with some allowing the outright owner to take the full deduction regardless of whether it reflected actual costs. In 2009, the Ninth Circuit, based partly in California, ruled against this type of deduction by an outright owner, and this will likely remain the law in the Golden State unless and until the matter is decided differently by a higher court or Congress clarifies the law (Ransom v. MBNA Am. Bank, N.A., No. 08-15066).
-
References
Resources
- Photo Credit Devin Cook
