Are You Eligible for a Chapter 7 Bankruptcy?

By Stephen Trezza

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 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.

Here is a hypothetical example of Schedule J in action. A debtor has a disposable monthly income of $100 per month. The overall unsecured debt he would eliminate via bankruptcy is $40,000. It is unlikely a trustee would view $100.00 as a large enough monthly payment to pay off the $40,000 in unsecured debt within a reasonable time.

In a second hypothetical example, this same debtor now has $500 in disposable income when his expenses are subtracted from his income. If so, the trustee may determine that the debtor has enough money left over at the end of the month to pay off his $40,000 in unsecured debt over a reasonable time span. If so, the case will likely 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. - 23687

About the Author:

Stephen Trezza has successfully taken on a wide variety of cases, including filing many Tucson chapter 7 cases. If you are looking for a Pima County bankruptcy attorney, visit the Trezza and Associates website now.