Some people understand the difference between Chapter 7 and Chapter 13 bankruptcies in California. In Chapter 7, a debtor can wipe out most of their debt without paying their creditors a dime. On the other hand, in Chapter 13, a petitioner will pay a portion or all their debt. One of the primary factors a court looks at is a person’s disposable income. A debtor will be required to pay their disposable income to their creditors. However, there are many possible deductions and allowable expenses that our Roseville, CA bankruptcy attorney could use to lower or eliminate your disposable income. Below, our experienced attorney from The Bankruptcy Group discusses how disposable income is defined and how it impacts your bankruptcy.
What is Disposable Income in a California Bankruptcy?
Before understanding how disposal income is treated in either a Chapter 7 or Chapter 13 bankruptcy, it is essential to determine what disposable income is in bankruptcy. Disposable income is the money left over after a petitioner subtracts their allowed expenses from their monthly gross income.
When a petitioner is completing their bankruptcy forms, they are entitled to deduct their necessary expenses. However, depending on the expense, this could be an actual expense or an allowable one. For example, if you are deducting your mortgage payment, you would list the exact amount. You would also be required to provide proof of the amount. On the other hand, your food allowance would usually be dictated by a national or local standard. Some deductions allowed include food, clothing, utilities, taxes, transportation costs, mortgage payments, rent, healthcare, and other expenses our California bankruptcy attorney would review with you.
Determining Disposable Income in a California Bankruptcy
Determining a potential debtor’s disposable income is a critical part of any bankruptcy. In many cases, the disposable income will dictate if a person is eligible to file for Chapter 7 or Chapter 13. What happens with your disposable income depends on the chapter of bankruptcy.
Chapter 7 Bankruptcy in California and the Means Test
When a person’s annual household income is below California’s state median, they qualify for Chapter 7. To determine a person’s annual household income, our Sacramento Chapter 7 bankruptcy attorney will have to complete the “means test.” Under this test, the household income for the previous six months before filing for bankruptcy is added together to determine the household’s average monthly gross income. Then, many deductions are subtracted, including taxes, mortgage payments, and other national and state standard allowances for things such as clothing, housing, and vehicles. If there is no or limited disposable income after these calculations, a person will qualify for Chapter 7 and will be able to keep their disposal income.
The Actual Income and Expenses Test for Disposal Income in California
The means test, while using actual numbers, is a bit abstract. However, even if you pass the means test, you might not be eligible for Chapter 7.
Everyone who files for bankruptcy will have to complete several forms called schedules. These schedules will list your personal property, exempt property, and your various debts. Two important schedules, schedule I and schedule J, are used to determine disposable income. On these schedules, a petitioner will list their monthly income and expenses.
When a petitioner files out these schedules, they are completing what is known as the actual income and expense test. Because the means test is somewhat abstracted, it does not always reflect a person’s real disposable income. Unfortunately, the actual income and expense test can only be used to disqualify someone for Chapter 7. It does not override the means test in the other direction.
The other difference between the two is the means test looks at the previous six months of income and expenses while the actual income and expenses test projects your financial situation going forward. If your income has increased over the last month or two, you could have passed the means test but will show excess disposable income on your schedules. Depending on the amount of disposable income available, a petitioner might be required to file for Chapter 13.
To illustrate this, imagine a person preparing to file for Chapter 7. Because they were unemployed for most of the previous year, they pass the means test. However, one month before filing for bankruptcy, they started a new job. When the new income is listed on their schedules and their monthly expenses subtracted, they show an excess of $350. If this is the case, the court will require them to file for Chapter 13 because they have the disposable income to pay at least a portion of their debts.
Chapter 13 and the Calculation of Your Disposable Income in California
Chapter 13 differs from Chapter 7 in that a petitioner will have to pay a monthly payment to their creditors through a bankruptcy plan. Depending on the means test, the bankruptcy will last either three or five years.
As stated above, the means test will determine if your household income qualifies you for Chapter 7. It is also possible to pass the means test and still have to file Chapter 13 because you have disposable income under the actual income and expenses test. When this occurs, the Chapter 13 case will last three years and you would have to pay your disposable income to your creditors.
However, if your means test calculation did not qualify you for Chapter 7, then our Sacramento Chapter 13 bankruptcy attorney will have to complete the Chapter 13 calculation of disposable income. This additional calculation will use the same income and many of the same allowable deductions used in the means test. However, the end result is the minimum amount you will be required to pay monthly for five years. Similar to what happens in Chapter 7, the actual income and expense test could show an additional excess of disposable income, increasing your monthly Chapter 13 plan payment.
Call Our California Bankruptcy Attorney to Review Your Disposable Income
Bankruptcy is complicated and there are many missteps a person could make without the assistance of an experienced Folsom, CA bankruptcy attorney. Calculating the means test and a person’s actual disposable income is critical in filing the appropriate chapter. In many situations, a person’s disposable income calculation will determine if a bankruptcy case is feasible. It is crucial to ensure all your qualified deductions and expenses are included. If you are considering filing for bankruptcy and want to know more about disposable income, call The Bankruptcy Group at 800-920-5351 to schedule a free, confidential consultation.