In Chapter 13 bankruptcy, you must devote all of your disposable income to your Chapter 13 repayment plan. Through the plan, which lasts either three or five years, you pay 100% of certain debts and a portion of other types of debts.
Keep in mind that even if you can fund a Chapter 13 plan with your disposable income, you still have to pay your unsecured creditors at least what they would have received had you filed for Chapter 7 bankruptcy. If you can't do that, your plan won't be confirmed. (To learn more about the plan, which debts must be paid in full, and how much your unsecured creditors must receive, see The Chapter 13 Bankruptcy Repayment Plan.)
Determining your "disposable income" for purposes of your repayment plan can be tricky business. And the caculation is different depending on whether your income is more or less than the median income in your state. Here are the basic rules.
Calculating Current Monthly Income
To determine your current monthly income in Chapter 13 bankruptcy, you take your average monthly income for the six-month period prior to filing for bankruptcy.
You must include gross wages, salary, tips, bonuses, overtime, commissions, income from the operation of a business, rental income, income from interest, dividends, and royalties, pension and retirement income, unemployment compensation, income someone else contributes to your household on a regular basis, and income received from other sources.
What happens in your actual income differs significantly from your average income in the prior six months? In a 2010 U.S. Supreme Court case, Hamilton v. Lanning, Court ruled that bankruptcy courts may consider changes in the your current income and expenses when calculating your disposable income.
Finding Your State's Median Income
Disposable income is the amount of income left over after the payment of required creditors and allowed monthly expenses.
Calculating Disposable Income If Your Income is Less Than the State Median Income
If your income falls below the median income in your state, use your current monthly income minus child support payments, foster care payments, and disability payments necessary for the care of a child.
You then subtract the following to come up with your disposable income:
- expenses reasonably necessary to support your children and yourself (such as rent, utilities, costs of clothing, food, medical and dental expenses, etc.)
- installment payments
- priority debts
- secured debt arrearages (like back mortgage or car payments), and
- debts secured by liens.
If you have income after subtracting these expense, you must pay this amount to your plan each month. If you don't have any income after subtracting these expenses, you won't be able to fund (and the court will not confirm) a plan.
Calculating Disposable Income If Your Income is More Than the State Median Income
If your income exceeds the median income in your state, calculating your disposable income is more complicated. You must use the expense amounts set by the IRS, which may differ from your actual exenses. In addition, you also subtract:
- out-of-pocket healthcare expenses
- income taxes, self-employment taxes, Social Security taxes, and Medicare taxes
- mandatory payroll deductions
- child support and alimony payments, and
- payments to priority claims.