When a debtor decides to file bankruptcy, in order to determine if they should file Chapter 7 bankruptcy or Chapter 13 bankruptcy it must first be determined if their income is above the median income for Texas. And a debtor's income is only determined by their past six months of income before filing bankruptcy. If it is determined that a debtor considering bankruptcy earns more than the median income for the state of Texas, there is a presumption of abuse of the bankruptcy system. So how does a debtor overcome this presumption of bankruptcy abuse?
The main way that a debtor can overcome the presumption of abuse in bankruptcy, is to take what is called the "means test" which allows them to determine how much disposable income the debtor has and whether or not they can file Chapter 7 bankruptcy or Chapter 13 bankruptcy. The means test will allow the bankruptcy debtor to deduct certain expenses from their income thus reducing their disposable income calculation. What type of expenses and the amount of these expenses are determined by the IRS, where the debtor lives and the size of the bankruptcy debtor's household. These expenses include general living expenses, such as for food, clothing, household supplies, personal care, housing and utilities, rent or mortgage expense, and transportation expenses. If a debtor is paying a mortgage, or car loan, the actual allowable "expense" is separate from the debt. Other necessary expenses include taxes, mandatory payroll deductions, life insurance, child care, health care and educational expenses directly related to employment. Working with a bankruptcy attorney will help the debtor identify all of the expenses they can deduct in the bankruptcy means test.