The higher-than-average wages in the Bay Area don’t disqualify you from bankruptcy, despite rampant misinformation about the bankruptcy means test.
The means test, added to bankruptcy law in 2005, was (poorly) designed to keep above average earners out of bankruptcy. But it hasn’t worked in the Bay Area, largely because of the cost of housing here.
Let’s crunch the numbers and see how you can qualify for bankruptcy despite living in the Bay Area.
The means test in the Bay Area
The means test starts by looking at household gross income in the six full months before filing and annualizes that number. Your gross income is compared to the incomes of all Californians with the same household size.
The median income for a household of four in California is $105,232 as of March, 2021, If your household income is less than that, you get to skip the means test. You can choose whichever bankruptcy chapter furthers your goals.
If you make more than the California median income, you take the next part of the test which looks at expenses. The formula tests whether you have more than $227 remaining at the end of the month after deduction for expenses deemed allowable.
Housing expense tips the scales
From your historic monthly income, you deduct your housing expense. If you’re a renter, the allowed amount comes from the IRS collection tables. For our family of four in Bay Area counties,
If you are a homeowner, you can deduct the actual cost of your mortgage payment, property taxes, and insurance. Again, that’s likely to be a substantial number.
So the expense of living here, right off the bat, eats into your income.
By the time you’ve deducted car payments, food, clothes, health care, child care, and income taxes, chances are your available income is greatly reduced. And if you owe back taxes or family support, that’s deducted from income as well.
The intricacies of the means test are what we at the Moran Law Group excel. We actually taught other bankruptcy lawyers about the means test when it was new.
Our goal is to show on the means test that, using Congress’s formula, you don’t have disposable income to pay your creditors. If we get to a disposable income number of $227 or less, you qualify to file the bankruptcy case of your choice.
Choosing a chapter
Having passed the means test, you are free to evaluate the debts you have, the income you expect in the future, and your goals to decide whether you are better off in Chapter 7 or in Chapter 13. If you have a business or debts over the Chapter 13 debt limits, you may want to file a Chapter 11.
But enjoying a high income typical in the Bay Area doesn’t lock you out of bankruptcy.