INCOME DOCUMENTATION: WHY THIS IS A CRITICAL STEP:
Debt and Expenses are only half the equation. Legal advice cannot be rendered without understanding household income.
For bankruptcy purposes first we examine if a debtor qualifies for a Chapter 7 discharge. Attorney calculates the six month average gross (before taxes) income, This number is called the Current Monthly Income (CMI). If CMI exceeds the California Median for household size, attorney must next perform a Means Test analysis to determine if debtor nonetheless can obtain Chapter 7 relief or whether Chapter 13 or a non-bankruptcy alternative is the proper remedy.
MEANS TEST CALCULATION SIMPLIFIED: Take Six Month Average Gross Income (gross means before any deductions are taken out such as income taxes) and subtract from it “allowable” expenses. To do this accurately, specific income documentation and other details you are asked on the Intake Sheet are needed. After deducting “allowable expenses” what is left is known as Disposable Monthly Income (DMI). If the DMI exceeds acceptable levels, the debtor is presumed to be able to afford to repay if not all then at least some portion of the debt.
Want the legal version? The Code explicitly defines “disposable income” as current monthly income, itself further defined in the Code (see 11 U.S.C. §101(10A)), less reasonable expenditures for a debtor’s support, a debtor’s dependent’s support, a debtor’s domestic support obligation, qualifying charitable contributions up to a specified limit and for the continued viability of a debtor’s business. 11 U.S.C. §1325(b)(2). If a debtor’s current monthly income exceeds the median family income of her state, the reasonableness of the expenditure amounts is determined by tests set forth in 11 U.S.C. §707(b)(2). 11 U.S.C. §1325(b)(3). Want to see the Form?
While Chapter 7 may be the preferred method of obtaining Bankruptcy relief, in some circumstances a Chapter 13 may actually be a better choice. This is true when a debtor is past due on car loans/mortgages and wishes to stop foreclosure/repossession or will be attempting to eliminate a second deed of trust mortgage from a primary residence.
It is impossible to calculate a potential payment plan under Chapter 13 without properly calculating Disposable Monthly Income as well as balances owed on secured debt obligation and unsecured priority debt (such as income taxes).