They say 90% of success is preparation. That statement could apply to filing for bankruptcy as well. The work done before a case is filed will often determine how a bankruptcy progresses. A skilled Roseville bankruptcy attorney will take the time to review a filer’s bank statements, tax returns, assets, and other financial documents. Part of the preparation process is completing the “means test,” which requires looking back at a filer’s household income.
More specifically, the means test looks at the previous six months of household income before the month of filing. For many potential debtors, the means test is the most important part of the pre-filing preparation. Our Roseville bankruptcy attorney will take a more detailed look at the means test, its implications, household income, and the lookback period below.
The Bankruptcy Group is committed to providing our clients with the best possible service. Our attorneys and staff understand that a significant amount of work on your bankruptcy must be done before the case is filed. To review your financial situation in a confidential and free appointment, contact our office at 1-800-920-5351.
The Means Test and the Six-Month Lookback in California
There are two common types, or chapters, of bankruptcy available to California residents: Chapter 7 and Chapter 13. Each chapter serves a different purpose and, in most cases, a person’s circumstances will dictate what chapter they need to file. For example, if your home was in foreclosure and you wanted to keep your house, you would file for Chapter 13. However, if you were renting an apartment, currently unemployed, and being sued by numerous credit card companies, a Chapter 7 bankruptcy could be the appropriate option.
Whether you file for Chapter 7 or Chapter 13, your California bankruptcy attorney will have to complete the means test. This test, or calculation, is used to determine if you are eligible to file for Chapter 7 and governs how much you are required to pay to unsecured creditors in Chapter 13.
At its core, the means test looks back at your household income for the previous six months. For instance, if you were to file a case in February, the means test would include all your household income from July through January. This income is prorated over twelve months and there are certainly actual and allowed deductions subtracted from your total income. In the end, a median income will be determined. If this number is below the median income in your area, you qualify for Chapter 7. If it is above, you are required to file for Chapter 13 and any monthly disposable income needs to be paid to your unsecured creditors.
What Qualifies as Household Income in California?
Income for the means test and the six-month lookback includes all household income. Household income is exactly what it sounds like, all monthly income that is available for you and your family to use.
Typically, the most common income is the salary of the filer. A potential debtor will have to provide six months of pay stubs to their Folsom bankruptcy attorney. If you are a business owner or are an independent contractor, you will have to provide a completed business questionnaire and monthly operating reports.
If you are married, household income also includes your spouse’s income. Other income that must be listed includes tax refunds, bonuses, contributions from friends or family members, unemployment compensation, pensions, child support, annuities, and just about any other form of income. However, there are some exceptions, including social security retirement and disability benefits.
Timing a California Bankruptcy and the Six-Month Lookback
When a potential debtor weighs the pros and cons of filing for bankruptcy, many factors must be considered. Some of these factors include the amount of debt, pending lawsuits, current income, non-exempt assets, and their overall financial goals. One factor that is sometimes ignored is the timing of the filing. Because of the required six-month lookback, an experienced California bankruptcy attorney will often advise a debtor to wait or to file immediately based on their last six months of household income.
Some bankruptcy cases must be filed immediately, for example, when a home is scheduled for a sheriff’s sale. However, in many situations, a debtor has the benefit of waiting for the opportune time to file their case. Following are some illustrative examples of when the timing is critical.
If you received an end-of-year bonus in December, it would double when your six months of income is prorated over a year. Therefore, when calculating the means test, the additional income from your bonus could put you over the median income and disqualify you for Chapter 7. In this case, it might be advisable to wait until August to file for bankruptcy, so the bonus is not included in the means test.
You are preparing to file your federal income taxes and are anticipating a substantial refund. If you wait to file after you have received your refund, it will be included in the six-month lookback period. Under these circumstances, a debtor should consider filing for bankruptcy before filing their taxes.
Some potential filers have control over their monthly income. For instance, you might take advantage of voluntary overtime to boost your weekly check. Overtime is considered household income and any overtime over the last six months must be reported. If the overtime makes you ineligible for Chapter 7, you could avoid it for several months and recalculate the means test with your ordinary income. Depending on your salary, this could mean declining overtime hours for two months or the entire six. While it might appear to be a hardship, it could be the difference between having your debt discharged through Chapter 7 and paying a monthly trustee payment for five years in Chapter 13.
Our California Bankruptcy Attorney Will Prepare Your Filing
Filing for bankruptcy is a process. It is crucial to work with a Sacramento bankruptcy attorney who is experienced and that you trust. At The Bankruptcy Group, our lawyers are dedicated to helping individuals and families out of economic despair. Part of that includes ensuring that a bankruptcy is filed at a time that most benefits the debtor. Call 1-800-920-5351 to review your bankruptcy options.