Are You Eligible for a Chapter 7 Bankruptcy?

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 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.

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 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.

Stephen Trezza has effectively managed a large number of cases, including filing many Phoenix bankruptcy cases. For further information about Phoenix bankruptcy attorneys, go to the FileBankruptcyinArizona site today.

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