California Chapter 7 Bankruptcy Income Limits

Living in California is expensive. The average cost of living is roughly 50% higher than the rest of the United States. So it’s understandable that some California residents wind up with unmanageable debt. When this happens, filing bankruptcy is sometimes the best way to get a fresh start. There are two common consumer bankruptcy options: Chapter 7 and Chapter 13.

You can discharge many of your unsecured debts in Chapter 7 bankruptcy, and the process is faster than Chapter 13. But to file Chapter 7, you have to pass a means test. The test considers your income and, in some cases, your living expenses. In this article, we take a look at the income limits for filing Chapter 7 bankruptcy in California.

Qualifying for Chapter 7 Bankruptcy 

Consumer bankruptcy helps individuals with too much debt get a financial fresh start. This means debtors can use Chapter 7 bankruptcy to get rid of certain unsecured debts, like credit card debt, without having to fully pay them back. In the past, there was a concern that some debtors would use the bankruptcy process to avoid paying debts they could afford to pay back. Because of this presumption of abuse, Congress revised the U.S. Bankruptcy Code in 2005 and changed the Chapter 7 bankruptcy rules. 

Under the new rules, you have to pass a means test to qualify for a Chapter 7 bankruptcy discharge. This test applies to filers in every state, but each state’s test has slightly different calculations. That’s because the median family income differs in each state, and median income is part of the calculation. As you can imagine, given the higher cost of living, the income limit for California bankruptcies is higher than many other states. That’s why there’s not one simple national standard.

The California bankruptcy means test has two parts. If you pass the first part — the median income test — you don’t have to do the second part, the full means test. The median income test looks to see if your household income falls below the median income in California for a family of the same size. If your income is lower than this income limit, you “pass” the means test and qualify to file Chapter 7. If your income is higher, you have to go through the full means test. 

This full means test looks at your income and your regular basic living expenses. If your allowed expenses are so high that you have little to no disposable income left over to pay at least part of your unsecured debt, you’ll pass this part of the means test.

Median Income Test 

As mentioned earlier, the Chapter 7 bankruptcy means test calculation has two parts. The first part is sometimes called the median income test. It compares your household income to the state’s median income for a similarly sized household to see if you make too much money to file a Chapter 7 bankruptcy petition. If you make more than the median income, you won’t pass this part of the test. If you pass this test, you’ll likely meet the income limit requirements to file Chapter 7 bankruptcy.

Median income data comes from the U.S. Census Bureau and the Department of Justice. You can see the median income information for California in the chart below. This data gets updated regularly, often every six months. Median income is the midpoint between all household incomes for each household size. That means half of Californians make more than the median amount and half make less.

Keep in mind that the median income test takes all household income into account. So even if you file for bankruptcy as an individual, the median income test will also consider any other wage earner’s income that’s part of your household. 

How To Calculate Income & Household Size 

Income for the means test is calculated in a specific way. First, add up all the gross monthly income for everyone in your household for the past six full months. Don’t count your current monthly income. Your gross monthly income is the amount you make before taxes or deductions. You should include child support, retirement income, unemployment benefits, and alimony payments in this calculation, but don’t include Social Security benefits. Next, take this number and double it to estimate your household’s annual income.

Now, you need to determine how many people are in your household. Generally, this will be the number of people living in your home. It’s often the same as your family size. But if someone is a roommate and pays their fair share of housing costs for rent, then they won’t be included as part of your household.

If your household’s income falls below California’s median income for a family of your size, then you pass the median income test and can most likely file Chapter 7 bankruptcy. And if your income is more than California’s median income, you can try to qualify for Chapter 7 bankruptcy by passing the full means test.

California Median Income Levels

California Median Income Standards for Means Test for Cases Filed On or After May 1, 2022

Chapter 7 Means Test 

If you don’t pass the median income test (the first part of the means test), you can still file Chapter 7 bankruptcy if you pass the full means test (the second part of the means test).The full means test reviews your income as well as your monthly expenses. This provides a more complete picture of whether you’re able to pay back creditors and have enough money left over to afford basic household expenses.

The full means test looks at all of your expenses, not just the debts you’re trying to discharge with Chapter 7 bankruptcy. So this will include things like:

• Utility bills

• Mortgage payments

• Car payments 

• Spousal support 

• Child support

• Child care

• Ongoing medical care

• Health insurance premiums

• Food costs

Of course, some people spend more money on these things than others. The court wants to ensure certain expenses are reasonable. Some of these amounts will be the actual amount you spend, such as your monthly mortgage payment or how much you owe to an ex-spouse in alimony. But the bankruptcy court stipulates other amounts, like the cost for monthly groceries The U.S. Department of Justice sets this amount.

The amounts the bankruptcy court stipulates vary based on where you live and the size of your household. For example, the court will allow more money for groceries for a family of four in California than it would for a family of two in Alabama. One thing the court won’t account for in calculating a filer’s basic living expenses is money for entertainment, no matter how reasonable the amount.

Once you’ve calculated your living expenses, you’ll compare this amount to your income. If your estimated living expenses are more than your income, you’ll most likely pass the full means test, and you can move on with the Chapter 7 bankruptcy process. If your estimated expenses are significantly less than your income you’ll likely have to file Chapter 13 instead of Chapter 7. That’s because you’ve shown you have enough disposable income to pay off some of your debts after paying your living expenses.

California's Business Debt Exception 

So far, the discussion about Chapter 7 income limits has revolved around an individual filing Chapter 7 bankruptcy to discharge personal consumer debts. But if you’re looking to get rid of mostly business debt, then much of what’s already been discussed won’t apply. In other words, you can often file Chapter 7 bankruptcy to discharge your business debts without having to go through either part of the Chapter 7 means test. This exception applies no matter how high your income is.

This brings up two major questions: Is the debt business-related? If so, is enough of your total dischargeable debt related to your business?

For Chapter 7 purposes, debt is considered business-related if it was created to earn a profit. This sounds like a lenient standard and there’s a reason for this. Bankruptcy law was written to protect individuals that are willing to take a risk by starting a business. But this doesn’t mean you can file Chapter 7 bankruptcy and go around the means test requirement by simply labeling a debt as business-related. The court will carefully review your bankruptcy filing to make sure you’re not abusing this business debt exception.

There’s also the question of how much business debt a filer needs to qualify for the Chapter 7 business debt exception. The general rule is that if more than 50% of the debt to be discharged in bankruptcy is business debt, the exception applies.

Let's Summarize... 

Chapter 7 of the U.S. Bankruptcy Code allows you to write off many of your unsecured debts. To make sure filers don’t abuse the system, you have to pass a means test and meet income eligibility requirements to file Chapter 7. 

The first part of the test looks at your annual household income. If this amount is less than California’s state median income guidelines, then you can file Chapter 7 bankruptcy. If your income exceeds the state median income limits, then you’ll factor in your expenses in the second part of the means test. If your expenses are high enough that you don’t have disposable income left ot pay at least a portion of your debts, you may qualify to file Chapter 7.

If you fail the means test, you can file a Chapter 13 bankruptcy case instead. This puts you on a repayment plan and can help you manage secured debts tied to property like your home. You can schedule a free consultation with a bankruptcy attorney to get legal advice. They can help you decide if bankruptcy or another debt relief option, like credit counseling, is right for you.