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.
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.
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.
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.