When an individual files for bankruptcy, there are generally two options as to the type of bankruptcy that is filed. A Chapter 7 Bankruptcy is the simple form of bankruptcy that clears your debt without you paying your creditors. A Chapter 7 bankruptcy case, on average, lasts only a few months. The other option is a Chapter 13 bankruptcy in which you make payments to your creditors over a period of 3-5 years and whatever debt is leftover at the end is then discharged.
It would seem that, given the choice, you would choose Chapter 7 bankruptcy because it takes less time and you can get a “fresh start” without having to make payments. However, there are certain requirements that need to be met for you to qualify to file a Chapter 7 bankruptcy. Your ability to file a Chapter 7 is predominantly based on your household income.
Each state determines a median income amount. This amount changes based on each year’s census, so it is best to consult with a local attorney to determine if you qualify for a Chapter 7 bankruptcy. It is important to note that this number is based on the amount of people who live in your household – the more people that live in your household, the higher the amount of income the court allows.
At the end of 2016, the median income for an individual (a household of 1) in California was around $51,000. This means that if you live alone and make less than $4,300 per month, you qualify to file a Chapter 7 bankruptcy. If you are married (even if only one spouse is filing for bankruptcy), the median household income for 2 people is approximately $69,000 or $5,700 per month.*
Just because your income is higher than the said amount does not automatically disqualify you from filing a Chapter 7 bankruptcy. For incomes that are higher than the median, the court applies the “means test” which is a calculation to see if you have the ability to make payments to your creditors in a Chapter 13 bankruptcy.
The means tests looks at your current household income and household expenses. Household income does not just include your paycheck, also any pensions, retirement plans, business income, etc. The amount of money leftover after you subtract your household expenses from your household income is the amount of money that you could pay your creditors with. Each state has a threshold as the amount that number can be.
As you can clearly see, bankruptcy is a very complex area of law. It is imperative that you consult with an experienced bankruptcy attorney in Los Angeles regarding your best options. Even if you have the ability to file a Chapter 7 bankruptcy does not mean that this is the best option for you.
*As mentioned, this was the median income at the end of 2016. The median income level changes all the time and therefore you should consult with an attorney to find out about the current requirements.