Disposable Income Used in Chapter 13

By Kevin Owen

Consumers have two options in bankruptcy court: Chapter 7 and Chapter 13. Chapter 7 liquidates assets and discharges your debts without further payment; Chapter 13 allows you to keep your car and house, but places you on a court-supervised repayment plan. If you are ineligible for Chapter 7 protection, by exceeding a means-tested average income limit for your geographic area, you must petition for Chapter 13 bankruptcy and commit your disposable income to pay creditors.

Repayment Plan

Under Chapter 13 bankruptcy, you are required to repay all or most of your debts over a three- to five-year period. After your payment plan is approved, your case is supervised by a court-appointed trustee who monitors your income and expenditures. The trustee ensures that all money that is not necessary for your daily living expenses is paid to your creditors.

Disposable Income

At the time you file your petition for bankruptcy, you must also submit a detailed accounting of your current income, including the amount of disposable income available for repayment to your creditors. To determine your monthly disposable income, you deduct your family's necessary living expenses from your total income. This amount is then used by the court to set your monthly payments.

Get a free, confidential bankruptcy evaluation. Learn More

Basic Living Expenses

In determining the basic living expenses that you are permitted to keep from your take-home pay, the court uses the National Standards established by the Internal Revenue Service. These living expenses are divided into five categories including food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous expenses. As of April 2012, the national standard for a family of four is $1,450 per month. In addition to these out-of-pocket expenses, the court allows you to keep a reasonable amount of take-home pay for your housing and utility bills, known as local standards. This amount is calculated by the court based on a reasonable rate for your geographic area.

Other Permissible Expenses

In addition to basic living expenses, such as food and housing, the court allows you to pay any expenses that are necessary for personal and economic well being. These expenses include any payments required for you to maintain employment, such as transportation, telephone bills and child care costs. Additionally, the court permits you to pay expenses that are otherwise required by law, such as payroll taxes, alimony and child support payments. Finally, you are permitted to keep money from your paycheck to pay doctor and hospital bills and the costs of prescription medication.

Get a free, confidential bankruptcy evaluation. Learn More
What Are Living Costs in Chapter 7?

References

Resources

Related articles

The Effects of Chapter 13 on Wage Garnishment

You may be considering filing for bankruptcy if your indebtedness is so severe that your wages are being garnished by your employer before you receive your pay. If you are eligible to file for Chapter 13 bankruptcy, you may be able to stop wage garnishment and setup a court-supervised payment plan to enable you to emerge from debt.

Social Security Rules for Diverting Income to a Trust

The Social Security Administration administers two benefit programs for the disabled: Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). Eligibility for disability is based on your work record and record of Social Security payroll taxes, but SSI does not require that an individual have a work history or pay in to the system. SSI is a means-tested program. In determining eligibility, the agency limits an applicant's income or assets, including those placed into a trust account.

Is a 401(k) Contribution a Legitimate Expense in Bankruptcy?

By the time you file for Chapter 13 bankruptcy protection, you may be on the verge of discontinuing contributions to your 401(k) retirement account in order to make your credit card payments. However, after submitting your bankruptcy petition, you may be permitted to continue making reasonable contributions to your 401(k) retirement account so you can plan for your financial security after emerging from bankruptcy.

Related articles

Is Social Security Included in the Means Test for Chapter 7?

Chapter 7 of the United States Bankruptcy Code permits you to discharge some of your consumer debt if you pass a means ...

California Bankruptcy Law: Maximum Income

When you file for Chapter 7 bankruptcy in California, the court will consider your monthly income to determine your ...

The Means Test and List of Allowable Expenses for Arizona Bankruptcy

Nationwide, bankruptcy law qualifications changed significantly in 2005 when the Bankruptcy Abuse Prevention and ...

The Process of Repossessing a Vehicle on a Delinquent Account in Chapter 13 Bankruptcy

In Chapter 13 bankruptcy you are granted immediate protection from creditors with an automatic stay that is enforceable ...

Browse by category
Ready to Begin? GET STARTED