A few years ago, bankruptcy laws were changed to avoid abuse of the system. They put requirements in place to make people prove they qualify to file for bankruptcy. In order to use Chapter 7 to liquidate your debts versus paying them down over time in Chapter 13, you have to qualify under the means test. There are formulas and forms that take into account things like your family size, location, last 6 months income, and expenses to make sure you don't make too much money. If you qualify under the means test, you can file Chapter 7. If you don't, you have to use Chapter 13 to reorganize your debt.
You should consult with an attorney to go over you situation to see if you qualify for Chapter 7 because if you file yourself under Chapter 7 and you do it incorrectly, the case will be dismissed quickly and you will have wasted the filing fee.
It is a mean test set up by the 2005 bankruptcy code amendments to keep high income people out of Chapter 7. It takes the last 6 months of household income and doubles it (the Code actually says average it and multiply by 12). This is considered you household income for the year. Then this figure is compared to the median standard income for a family your size in your area. If you make more, then you must complete the test using some numbers taken from the IRS and some actual numbers. It is complicated and is best completed by an attorney if you over the median standard income.
Just Google Median Standard Income in Bankruptcy and you will find the income numbers used.
[This communication is intended as general information and not specific legal advice, and this communication does not create an attorney-client relationship.]
Mitchell P. Goldstein
Richmond, VA 23230
The answers above explain the means test but I will add my two cents when it comes to Orange County, CA. The means test is tricky down here because the cost of living is so high but we have to work with the median household income of the State of California. For example, the median income for a family of four is $79,194 (as of March 15, 2010). This is a very low threshold as many families struggle in Southern California who earn significantly more than that. Finally, even if you are above the median income there are several strategies to get you to pass the means test so you will be able to file a Chapter 7 case. You just need to find an attorney who is willing to work with you on it as it can take a lot of extra work.
Please note that although this answer may provide information concerning potential legal issues, it is not a substitute for legal advice from qualified counsel. You should consult an attorney for individual advice regarding your own situation. Answering this question does not create any attorney-client relationship between you and Kelly Zinser, Partner at Olenicoff & Zinser, PC.