What is Disposable Income?
To determine disposable income, the bankruptcy court will compare your annual gross income with similar-sized households in your state. Tax returns for four years before filing must also be submitted, along with proof of completing a credit counseling course before bankruptcy filing.
Your regular income consists of wages, salaries, and tips; interest from savings accounts and investments; rent from the property you own or manage; government benefits such as pensions or social security payments; and child or spousal support payments.
Income earned from businesses or rental properties that you use personally must also be excluded, along with lottery winnings or gambling winnings tax-payable lottery winnings or gambling income. Finally, proof of having enough regular income to repay creditors some debt over three to five-year repayment plans must be shown.
How To Calculate Disposable Income?
One key component to determine is disposable income, or funds available after necessary living expenses have been met. These expenses include rent/mortgage payments, food, utilities, phone service contracts, and transportation expenses.
Accurate documentation of expenses and all sources of income is vital. This may present unique challenges for individuals in part-time living situations with complex tax claims or child support arrangements.
Many individuals also face mandatory deductions from paychecks, such as federal and state income taxes, employer-match retirement contributions, and union dues. These expenses do not appear on pay stubs and can create a significant discrepancy between what appears on a net paycheck figure and the true disposable income figure.
If your monthly disposable income falls below the median income for your state and household size, you will easily pass the Chapter 7 means test and can skip to Part 2. However, if it exceeds this amount, a more intensive calculation must be performed to ascertain eligibility. A knowledgeable attorney could be invaluable in providing guidance.
Additional Calculations
However, additional calculations must be performed if your disposable income exceeds the threshold amount. These calculations include examining your priority debts (like bankruptcy filing fees and support obligations), secured debts that will survive repayment plans such as mortgages and car loans, and nonpriority unsecured claims that remain after three or five years – such as secured claims such as mortgages. Eventually, the court will assess if your repayment plan can cover these amounts over that time.
Evaluating Secured & Unsecured Debt Limits
As previously discussed, unsecured debts, such as credit cards and medical bills, are those without collateral backing them up. On the other hand, secured debts such as mortgage or car loans typically feature repayment plans to secure payment of these debts.
Like Chapter 7 debtors, Chapter 13 debtors must subtract allowable expenses from income to determine disposable income and compare this number against each state’s median household income for households of your size. If your disposable income falls within or below this range, you have passed the means test and can file Chapter 7.