A Bankruptcy Filer’s Guide to Disposable Income

Chapter 13 bankruptcy is also sometimes called “wage earner bankruptcy” or “reorganization bankruptcy.” Unlike Chapter 7, which discharges most or all debts once the bankruptcy is finalized, Chapter 13 requires debtors to send their disposable income to the bankruptcy trustee for three to five years. This disposable income is used to pay debts during this time. Because of the strict requirements of the repayment plan, it’s imperative that debtors consult a bankruptcy lawyer about their disposable income prior to filing for Chapter 13.

Calculating Your Monthly Income

For the purposes of filing for Chapter 13 bankruptcy, your income is the average monthly income you earned over the six months prior to filing for bankruptcy. If you’re a W-2 worker with no side businesses, your calculations should be fairly simple. If your financial situation is more complex, you’ll need to make sure you include the following income, if applicable:

• Tips
• Bonuses
• Rental income
• Self-employment income
• Royalties
• Dividends
• Pension and retirement income
• Unemployment compensation
• Income from interest
• Income regularly contributed to the household by another party

Of course, you’ll also need to add your gross wages to your monthly income. Let your bankruptcy lawyer know if your current income is substantially different from your average income for the past six months. A U.S. Supreme Court case from 2010 set a precedent for allowing bankruptcy courts to take these changes into consideration.

Calculating Your Disposable Income

Assuming that your lawyer has already determined that your income is more than the state median income, your attorney will then calculate your disposable income based on the expense amounts established by the IRS. These living expense categories include food and clothing. In addition, you can subtract your expenses for child support, spousal support, mandatory payroll deductions, out-of-pocket healthcare expenses, and payments for priority claims. You’ll also deduct your income, Social Security, self-employment, and Medicare taxes. The amount that remains is your disposable income, which you’ll pay to your creditors during the bankruptcy repayment period.

For clear answers to your questions about Chapter 13 bankruptcy, you can trust the team at Cutler & Associates, Ltd. We’ve assisted families in the Chicagoland area since 1990.