Can You File a Chapter 7 If You Make More Than the Median Income in California?
In 2005, federal bankruptcy laws were changed and new qualification tests were implemented for debtors wanting to file Chapter 7. Because of the changes, the bankruptcy court now "presumes abuse" of the bankruptcy system if you file Chapter 7 with an income above your state's median income. In California, you can still file Chapter 7 if you make more than the median income, but you may have to justify high monthly expenses to qualify.
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California Median Income Test
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The median income test is the first step to determining whether you qualify for Chapter 7 bankruptcy in California. This procedure is a simple comparison of annualizing your income from the past six months and comparing that to the median income in California for a household of your size. For example, if you have a wife but no children and have an annualized income of $60,000, you fall under the California median income of $61,954 for a two-person household. By this measure, you qualify to file Chapter 7.
Bankruptcy Means Test and Disposable Income
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If you are over the median income in California, you must complete all sections of Bankruptcy Form 22A, known as the means test. On the means test, you are allowed to subtract certain expenses from your income in order to determine how much money you have left over every month. This amount is known as your disposable income. If your 60-month disposable income exceeds $11,725, you may not be able to file Chapter 7 as this qualifies as a "presumption of abuse."
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Presumption of Abuse
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A presumption of abuse by the bankruptcy trustee does not mean that your case will be automatically thrown out of court. However, it does mean that the U.S. trustee will take a closer look at your petition to determine whether you are entitled to a discharge. A presumption of abuse is typically triggered if you have a high annual income or if you have excessive monthly disposable income as determined by the court.
In these scenarios, if you cannot prove to the trustee's satisfaction that your necessary and allowable expenses preclude you from paying off at least some of your debt, you may be faced with a choice of filing Chapter 13 bankruptcy instead or having your case dismissed. If a U.S. trustee examines your case, he will typically request extensive additional documentation of your income and expenses, such as tax returns for multiple years, additional pay stubs, asset documentation and bank and credit card statements.
Chapter 13 Bankruptcy
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If you do not qualify for Chapter 7 bankruptcy, you can usually file for Chapter 13 to avoid dismissal of your petition. In a Chapter 13 case, you still receive a discharge of your debts but you must first make payments to your creditors. If you are under the California median income, your payment plan will last three years; if you are over the median income, you must pay for five years.
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