Your Chapter 13 disposable income is your current monthly income minus your allowed monthly expenses, and you must pay every dollar of it into your Chapter 13 repayment plan, which runs for either three or five years. Calculating that number comes down to one threshold question: Is your income above or below your state's median income? Below, you'll find out how to figure your current monthly income, how the median income comparison changes your math, and what happens if your income shifts mid-plan.
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.
What Is Disposable Income in Chapter 13 Bankruptcy?
Disposable income is what's left over each month after you subtract your required creditor payments and allowed monthly expenses from your current monthly income. That leftover amount is what the law expects you to pay your creditors through your plan, so getting this calculation right determines both whether your plan gets confirmed and how much you'll owe. (11 U.S.C. § 1325(b)(2).)
How Is Chapter 13 Disposable Income Calculated?
Your calculation method depends on whether your current monthly income is above or below your state's median income for a household your size. That same comparison also sets your plan's "applicable commitment period."
You can find your state's median income on the website of the U.S. Trustee Program, a division of the U.S. Department of Justice. Look for "Means Testing Information" and select the current data effective date for your filing.
Below-median filers generally commit to a three-year plan. Your bankruptcy paperwork does this math for you. Every filer completes Official Form 122C-1 to report current monthly income and compare it to the state median. If you're married and living with your spouse, you'll need to include your spouse's income too, even if your spouse isn't filing with you, though you can exclude the part your spouse uses for separate, non-household expenses through a "marital adjustment." You'll also include any regular contributions other household members make toward shared expenses.
When completing these forms, it helps to understand the differences between household members for the means test and dependents for Schedule J. (11 U.S.C. § 1325(b)(4).)
If your gross monthly household income exceeds the median for your state, you're an above-median filer and must commit to five years of creditor payments. You'll also complete Form 122C-2 to apply the standardized expense deductions covered below and determine the amount you'll be required to pay toward unsecured creditors.
The table below breaks down how the two paths differ.
|
Key Factor |
Below-Median Income |
Above-Median Income |
|
Expense Method |
You deduct your actual, reasonably necessary living expenses. |
You deduct standardized amounts set by the IRS, not your actual expenses. |
|
Plan Length |
Generally three years |
Generally five years |
|
Required Forms |
Official Form 122C-1 only |
Official Form 122C-1 and Form 122C-2 |
Calculating Disposable Income If Your Income Is Below the State Median
If your income falls below the median, you subtract your actual, reasonably necessary expenses from your current monthly income to reach your disposable income. Start with your current monthly income minus child support payments, foster care payments, and disability payments necessary for the care of a child. Then subtract the following:
- expenses reasonably necessary to support your children and yourself (such as rent, utilities, 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 any income remaining, you'll pay the required amount into your plan each month. If nothing remains, you won't be able to fund (and the court won't confirm) a plan.
Calculating Disposable Income If Your Income Is Above the State Median
If your income exceeds the median, you'll use standardized expense amounts set by the IRS instead of your actual expenses, which makes this calculation more complicated. This standardized approach comes from the Chapter 7 means test, which the Bankruptcy Code borrows to set expense deductions for above-median Chapter 13 filers. (11 U.S.C. § 707(b)(2); 11 U.S.C. § 1325(b)(3).)
On top of the IRS expense amounts, 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.
You'll want to refer to the form for specific allowed deductions. You'll find charts for IRS allowed deductions on the U.S. Trustee Program website.
What Counts as Current Monthly Income in Chapter 13?
Your current monthly income is your average monthly income for the six months before you filed for bankruptcy, and it's the starting figure for every calculation above. 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 regularly, and income received from other sources. (11 U.S.C. § 101(10A).)
Courts can adjust this figure if your actual income differs significantly from your six-month average. In the 2010 U.S. Supreme Court case Hamilton v. Lanning, the Court ruled that bankruptcy courts can consider known or virtually certain changes in your income and expenses when calculating your disposable income, rather than sticking to a mechanical six-month average.
What Happens If Your Income Changes During Your Chapter 13 Plan?
If your income drops and you can no longer afford your payment, you (or the trustee) can ask the court to modify your plan going forward and lower the payment to match your new disposable income. If a job loss or disability makes any further payments impossible, you might qualify for a hardship discharge, which can release you from your remaining unsecured debts even though you haven't completed the plan. (11 U.S.C. § 1328; 11 U.S.C. § 1329.)
Learn more about what happens when you can't make your Chapter 13 payment.
Next Steps in Your Bankruptcy Case
Your Chapter 13 payment gets set by comparing your current monthly income to your state's median, then subtracting either your actual expenses or the IRS's standard expenses, and you owe that amount to your creditors for the full three- or five-year plan unless the court approves a modification. Here are a few articles worth reading next.
