In order for an individual to successfully file for Chapter 7 relief, he or she must generally either pass the "Median Income Test" or be exempt from its application. To be exempt, 51% or more of an individual's debt must be non-consumer debt. While we could spend pages on non-consumer debt, in short, non-consumer debt is debt incurred for a business purpose OR debt that was not incurred for personal, family, or household purposes. The latter generally refers to back taxes, some judgments and most medical bills. There are additional exceptions to the Median Income Test for active duty military personnel and disabled veterans. These exceptions are limited and seldom apply. If you believe you should be excluded from the Median Income Test, call (714) 962-1892 or email me at email@example.com and we will discuss its applicability to your situation free of charge.
Assuming the Median Income Test applies, what is it? The test requires that your annual gross income be below the median income for a family of your size, in your state. Your annual gross income is calculated by adding up all gross income (assume everything is income other than Social Security) received for the last 6 months (ending the last day of the previous month) and doubling it. For example, if you grossed $18,000.00 in wages and won $3,000.00 on a lottery ticket in the past six months, that's $21,000.00. Double that and your income for test purposes is $42,000.00. As of today (2/19/2013), the annual median income for a single person in California is $47,433.00, so you would pass the test in this scenario.
The applicable income numbers are based on family size. For example, a married couple without children is a family of two and therefore will have to have income below the median for a family of that size (even if only one spouse files). Currently the median income for a married couple in California is $61,752.00, so for one or both spouses to file, their combined gross income should be under $30,876.00 for the past 6 months. The more children or other dependants a person has, the greater the median income for that family size will be. However, exactly who you can take as a dependent is not always clear and if your dependant has income, how much should be attributed to you is not fully settled. The Office of the United States Trustee publishes and revises median income figures twice a year. You can look up the applicable median income figures on their website at: http://www.justice.gov/ust/eo/bapcpa/20120501/bci_data/median_income_table.htm.
If your income is below the median, you pass the Median Income Test and your income will probably not prevent you from filing and successfully concluding a Chapter 7 bankruptcy. I say "probably" because even if you pass the Median Income Test, you must list your current income and monthly expenses on your bankruptcy petition. If your petition reflects a substantial amount of disposable income, the court could still find your filing an abuse and dismiss your Chapter 7.
Let me give you an extreme example to illustrate the point. Say you're a 25 year-old single guy with $50,000.00 in unsecured debt, you live at home and pay no rent , food, utilities, etc. You also earn $40,000.00 a year and your employer provides your health insurance at no cost. Although you'd pass the Median Income Test, in this situation you'd have substantial disposal income such that the court could find that you have the ability to pay your debts or at least a substantial portion of them through a Chapter 13. Similarly, it is possible to pass the Median Test (because it's based on a 6 month average) yet have significant disposable income because of a recent or expected increase in income. If you find yourself in any of these situations, it is important to have a knowledgeable attorney scrutinize your monthly expenses (because the court/trustee surely will).