Under the US Bankruptcy Code, 11 USC §101 et seq., people with overwhelming debts are entitled to file for bankruptcy to obtain relief from their financial stress and worry. Some people are entitled to obtain FULL discharge of qualified debts. We say qualified because certain debts cannot be eliminated via discharge. Common examples of non-dischargeable debts are unpaid taxes and student loans. However, most consumer debts can be discharged.
- Credit card debt
- Unpaid rent
- Hospital and medical bills
- Utility bills
- To be eligible for full discharge and elimination of debts, a debtor must meet one of two tests. Here is a quick explanation.
The Median Income Test
Full discharge of debts is available if an individual (or a small business) falls below certain levels of income based on where the individual lives and how many people are in the debtor's household. Determining whether you meet the median income test is one of the most important services provided by a debt relief attorney.
The median income test begins by evaluating the debtor's gross monthly income for the six months prior to filing. All sources of income are included. Common examples include wages, tips, bonuses and overtime. But other sources of income must also be added in like any unemployment or workers compensation benefits received.
Next, the debtor's average gross monthly income is compared to the typical gross monthly income for people who live in the debtor's geographic area based on the size of their household.
For example, here in the Irvine metro area (Orange County), the typical gross monthly income for various-sized households are approximately:
- $5,000 for a single-person household
- $6,500 for a two-person household
- $7,000 for a three-person household
- $8,400 for a four-person household
These numbers are approximates and are for mid-2020. The numbers change periodically. If a debtor's gross monthly income falls below these levels, then the debtor is eligible to file for full discharge.
The Means Test
If a debtor has too much income to meet the median income test, full discharge may still be available if the debtor satisfies the "means test." Under the means test, expenses are taken into account. The purpose of the means test is to calculate whether the debtor has excess income that can be used to make SOME payments on the debt.The means test is complicated, but, in simple terms, a comparison is made of the debtor's gross monthly income with the debtor's deductions (such as for taxes and union dues) and with the debtor's living expenses (such as rent and debt payments).
If the debtor's income is about equal to the debtor's expenses, then the debtor is probably eligible for full discharge. Otherwise, the debtor can seek debt relief under Chapter 13.
Contact an Experienced Debt Relief and Debtor Rights Attorney
For more information, contact the Debtor's Rights attorneys at Guardian Litigation Group. We have the tools and experience you need. Our Mission is to provide unparalleled legal services and support to financially distressed individuals. We can be reached via our contact page.