A debtor must qualify for two different assessments in order to file for a chapter 7 bankruptcy. The bankruptcy trustee first applies the median/means test, averaging the debtor’s income over the previous six months. Under the requirements of Schedule J of the bankruptcy petition, the trustee also will analyze the debtor’s current income and compare it to the current expenditures. If the trustee determines that the debtor qualifies under both of these analyses, then filing for a chapter 7 bankruptcy is allowed.
The median/means test is simply a clear-cut analysis of the debtor’s income and expenses. Bankruptcy rules take into account the size of the debtor’s family and in which county the debtor resides. An amount of what the debtor’s gross income must be under is then set. If the debtor’s combined gross income is under this amount, the median test has been satisfied. If the income is greater than the allowable amount, the bankruptcy trustee will apply the means section of the test. The means test compares a six-month average of the debtor’s income to a six-month average of the debtor’s expense. If the income average is less than the expenses, the debtor qualifies under the median portion of the test.
The other income analysis that the bankruptcy trustee will consider involves Schedule I and J of the bankruptcy petition, which address the debtor’s current monthly income and current monthly expenses. He or she will be looking to ensure that a debtor does not have much disposable income with which to make monthly payments toward debts. If the debtor has disposable income that is sufficient enough to make significant monthly payments toward creditors, the debtor’s case will likely be dismissed if filed with the court. This is a judgment call by the trustee and does not involve a black-and-white analysis as the median test does.
Consider this hypothetical example of Schedule J. The debtor filing for bankruptcy has a disposable income of $100 per month. The overall unsecured debt that would be eliminated in the bankruptcy would be $40,000. It is unlikely that a bankruptcy trustee would consider this small amount of disposable income as a large enough monthly payment to pay the 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 important to note that the bankruptcy rules only allow certain, specific expenses to be included in the Schedule J calculation. Other expenses can be included, but it is the choice of the trustee whether or not to allow them to be listed as an expense for bankruptcy purposes. If he chooses not to include these in the calculation of a debtor’s monthly expenses, the debtor’s disposable income can increase significantly. A significant increase will typically result in the dismissal of a debtor’s case.
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