California residents who file Chapter 7 bankruptcies must pass a means test before their cases are processed. This means test was introduced when the nation’s bankruptcy law was revised in 2005 to prevent people who are able to afford to pay their bills from taking advantage of the system. Many people put off filing for bankruptcy because they worry about failing the means test, but this fear is usually unfounded because most filers pass it quite easily. These are two parts to the means test, and people who pass the first part do not have to take the second part.
The first part of the means test compares the bankruptcy filer’s income with the median income in the state where they live. Incomes are quite high in California, which makes passing this part of the bankruptcy means test easier in the Golden State than it is in other parts of the country. According to U.S. Census Bureau data, which is the information bankruptcy courts use when applying the means test, the median income in California in 2021 was $84,097.
If you earn more than California’s median income, you could still file a Chapter 7 bankruptcy if you pass the second part of the means test. During this part of the test, your income will be adjusted by deducting allowable expenses. Once again, the rules are far more lenient than most people believe because the amounts permitted for expenses like housing, transportation and utilities are adjusted to account for regional differences in the cost of living. If you still fail the means test after your allowable expenses have been deducted from your income, you could seek debt relief by filing a Chapter 13 bankruptcy.
The harsh reputation of the Chapter 7 means test is just one of the many myths surrounding personal bankruptcy. Debt relief is available to give people a second chance and not punish them for mistakes they may have made, and the means test is far less fearsome than lenders claim. Most of the people who have taken the Chapter 7 bankruptcy means test passed it, but very few of them thought they would.