Bankruptcy’s means test is a paper tiger in the San Francisco Bay Area.
Really!
You can see why few Bay Area residents are constrained by the means test when you compare the latest median income figures used in the means test with the allowed cost of rental housing here.
To review: Congress in 2005 tried to write a universal formula to limit bankruptcy relief to those who “needed” it. Bankruptcy judges were to be stripped of discretion in favor of a formula that would be universal.
Those whose average income in the past six months exceeded the median for their state would have to show that they had little more than $200 a month left over after subtracting some standardized allowances for food, clothing and housing and their actual projected expenses for other allowed costs of living.
Never fear, the cost of housing in the Bay Area stands this formula on its head. (While the exact numbers have changed since 2016, when this piece debuted, the principle remains the same.)
The means test numbers
The means test starts with the median income in the state for a family of each size. Income numbers and the fixed deductions from income are updated twice a year.
The new numbers become effective for cases filed April 1, 2016 or after.
Our survey says, the median income in California for a single person household is $ 50, 579. Make a dollar more than that and you have to pass the means test to file Chapter 7.
That median income translates to a monthly gross income of $4215 for one person.
How does that work in the Bay Area?
Bankruptcy in San Mateo County
Apply the new cost of housing numbers, and passing the means test is a piece of cake:
The allowed deduction for rent for a single person in San Mateo County is $2508. Non rent costs of housing like utilities add $461 a month to the cost of putting a roof over your head.
Seventy percent of a median income single worker’s gross income goes to housing! Most financial advisors target 31-35% of gross income for the cost of housing.
A single person in San Mateo County would have to gross nearly $9000 a month before their housing expenses were only one third of their gross monthly income.
Since the numbers vary by the size of the family, let’s look at a hypothetical family of four in San Mateo County.
Median income for a family of four in California is $81,837, or $6820 a month, before taxes and other deductions.
Rent in San Mateo County for those four people is $3462, with an additional $636 in additional housing expense.
Our median income family is paying 53% of their gross income for housing. They’d have to gross $12,418 before the allowed cost of housing was only one third of their income.
With slight variations, the result is the same for all Bay Area counties.
Actual mortgage payment are deductible
If you are a homeowner with a mortgage, you may be paying substantially more than the housing allowance we talked about in the context of renting. Your actual mortgage payment or payments are an allowed deduction on the means test. The real world cost of a house here gets reflected in the means tes.
What the means test numbers mean for Bay Area debtors
It’s no news that it costs a lot to live in the Bay Area.
After you’ve put a roof over your head, there isn’t a lot left for all the other things that you need, like food, transportation and health care. All of those things are deductible on the means test as well.
So, if you are servicing credit card debt, you are probably spending money on long ago purchases that is desperately needed for current expenses, not to mention retirement savings.
Know that the means test is not likely to bar you from bankruptcy.
Only you know what is keeping you from a fresh start.
More about deciding about debt
More on deductible means test expenses
Bankruptcy makes the future better
Image: licensed under Creative Commons license by Cucchiaio
Updated with April, 2016 numbers.
