How does the “disposable income” test really work in Chapter 13?

The “disposable income” test is the most important test in determining how much you will have to pay to your unsecured creditors in your chapter 13 bankruptcy. Although the process is complex, this article should give you a better understanding of WHY you are required to pay what you are, and HOW a court determines this.

Under the law, a debtor must commit all of his or her projected disposable income for three to five years. Projected disposable income is determined by taking your “current monthly income” and subtracting your “reasonably necessary expenses”.

Step #1: Determining the length of your plan: How many years will you have to pay?

First a court looks to your income. If your “current monthly income” is greater than the median income for your family size and State of residence, then you must commit to a 5 year plan. If you are equal to or below the median income for your family size and State of residence then you must commit to at least a 3 year plan.

Step #2: Determining the debtor’s expenses:

Although one would think the term expenses would be simple, bankruptcy law determines what your “expenses” are depending on if you are.

If you are a below median income debtor, the court will not evaluate your budget. You will only pay a small amount to unsecured creditors under the plan.

However, if you are an above median income debtor the court only allows certain expenses listed in the bankruptcy code. An example would be the vehicle ownership deduction, which allows you to take around $472 as an “expense” if you are making payments on or leasing a vehicle. Unfortunately, if you own the vehicle outright, you will not be able to take the expense.

Step #3: The Calculation:

The Court then subtracts these two figures along with any payments you receive on account of a child. The resulting number is your “projected disposable income”. This is the amount of money you will have to pay to unsecured creditors under the plan.

In order to fully evaluate your chapter 13 case and the specifics of your case, you must consult with a competent Tucson chapter 13 bankruptcy.