Not everyone is eligible for a discharge under Chapter 7 bankruptcy. These types of cases are reserved to people that cannot afford to repay some or all of their debt. Trustees use a means test to calculate a debtor’s disposable income. If they have too much disposable income then they may not be eligible for a discharge under Chapter 7.
The Means Test calculates an average income for the last six months. All income except money received from the Social Security Administration is used to determine average income. On the Means Test the six month average is referred to as current monthly income. After current months income is determined, deductions are calculated. Debtors get deductions for all sorts of expenses including taxes, health insurance, life insurance, out of pocket medical expenses, household living expenses, operating a vehicle, lease or ownership expenses associated with a vehicle, charitable contributions, and several other types of expenses.
Once the deductions are calculated, the total is subtracted from the current monthly income. The resulting positive or negative number is the debtor’s disposable income. Too much disposable income means that a presumption of abuse exists. A presumption of abuse means that it is presumed to be an abuse for this person to receive a discharge under Chapter 7 because they have too much disposable income.
However, in law a presumption can be rebutted. You may recall that the current monthly income is calculated using an average of the last six months. However, that may not be a good indicator of the debtor’s current income situation. If six months ago the Debtor had a job earning $200,000 a year, but five months ago they lost their job, then based upon the average of the six months a presumption of abuse may exist because the current monthly income is too high. In this case the presumption could be rebutted because the debtor has no income today, and should qualify for a Chapter 7 discharge based upon a change in their financial circumstances.