There are two different analyses that a bankruptcy trustee will use to determine a debtor’s eligibility for chapter 7 bankruptcy. In the median/means test, the trustee will use an average of a debtor’s income over the prior six months.
For Schedule J of the bankruptcy petition, the trustee will look at a debtor’s current income and compare it to his current expenses. The trustee must be satisfied that a debtor qualifies under both analyses to qualify for a chapter 7 bankruptcy.
The median/means test is a straightforward analysis of a debtor’s income. The bankruptcy rules take into account the county in which the debtor lives and his family size. It then sets an amount that the debtor’s gross income must be under in order to qualify for a chapter 7 bankruptcy. If the debtor’s combined gross income is under that cutoff amount, then the means test is satisfied.
If the income calculation is over this amount, the debtor may still qualify under the means portion of the test. This will compare the six month average of his income to a six month average of his expenses. If the former is less than the latter, the test is satisfied.
The bankruptcy trustee also determines eligibility under Schedule I and J of the bankruptcy petition. Where the median/means test is a more black-and-white analysis of the debtor’s financial situation, the analysis under Schedule I and J are more of a judgment call.
The trustee looks to see whether the debtor has enough disposable income to make significant monthly payments to his or her creditors. If the trustee determines that the debtor does have sufficient disposable income, the debtor’s case will likely be dismissed by the court.
Much of this analysis is common sense. For example, if a debtor has an overall unsecured debt of $40,000, but the disposable income is $100 per month, the trustee probably would determine that this small amount of disposable income will be insufficient as a monthly payment to eliminate unsecured debt in a reasonable amount of time.
However, if this same debtor had $500 or $600 of disposable income each month after expenses have been deducted, the results could be different.
The trustee might well determine that this amount of disposable income is sufficient to make payments and eliminate the unsecured debt in a reasonable amount of time. If this is the trustee’s determination, the case probably will be dismissed.
It is also important to note that bankruptcy rules only allow for certain expenses to be included on the Schedule J calculation. The trustee determines what, if any, other expenses can be included in the bankruptcy petition.
If the trustee chooses not to include some of the expenses, it can increase the debtor’s monthly amount of disposable income. If this amount increases significantly, then typically you’ll find that the debtor’s case will be dismissed by the court.
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