A bankruptcy trustee uses two different analyses to determine whether or not a debtor is eligible for a chapter 7 bankruptcy. Using the median/means test, the trustee averages the debtor’s income for the previous six months. In addition, the trustee will look at a debtor’s current income and compare this to the current expenses as required under Schedule J of the bankruptcy petition. A debtor must qualify using both of these assessments in order to file for 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 other analysis used to determine eligibility for chapter 7 falls under Schedule I and J of the bankruptcy petition. The bankruptcy trustee will compare the debtor’s current monthly income and current monthly expenses. The trustee is looking to make sure that the debtor does have sufficient disposable income in which to pay monthly debts. If the debtor does have enough disposable income to discharge debts, the case will likely be dismissed if it has been filed with the court. Unlike the means/median test, this is a judgment call made by the bankruptcy trustee.
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.
The bankruptcy trustee has much discretion in determining which expenses can be included in bankruptcy petition. Under Schedule J, only certain, specific expenses are allowable. If the trustee determines that some of these expenditures do not qualify for inclusion into the calculation of the debtor’s monthly expenses, then the trustee will not include them in the petition. This can increase the debtor’s amount of disposable income considerably, and if the increase is significant, then the case will likely be dismissed.
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