INCOME DOCUMENTATION: A CRITICAL STEP:
Debt & Living Expense are only half of the equation. Proper advice cannot be rendered without understanding household income.
It is imperative to examine if a debtor qualifies for a Chapter 7 filing. To do this, attorney calculates the six month average gross (before taxes) income, also known as Current Monthly Income (CMI). If CMI exceeds the California Median for household size, attorney must calculate what is known as a Means Test to determine if debtor(s) nonetheless can obtain Chapter 7 relief or if Chapter 13 or non-bankruptcy alternatives are the proper remedies.
MEANS TEST CALCULATION SIMPLIFIED: Take Six Month Average Gross Income and subtract from it "allowable" expenses. To do this accurately, specific income documentation and details from 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.
While Chapter 7 may be the preferred method of obtaining Bankruptcy relief, in some circumstances a Chapter 13 may actually be a better option. 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 Current Monthly Income (as defined by law), household expenses, types and amounts of all debt, assets owned by debtor(s).
