How is disposable income calculated in Chapter 13?
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When you get behind on your bills, it can be hard to catch up. And, unfortunately, some creditors won't work with you to let you get caught up on back balances. If this is the situation you find yourself in, filing Chapter 13 bankruptcy may be a good solution for you. There is no income cap on a Chapter 13 filing, nor is there a means test you have to pass to be able to file. But what is important to getting your Chapter 13 repayment plan approved is your disposable income in comparison to your debts.
How Chapter 13 Repayment Plans Work
A repayment plan allows you to catch up on past-due balances. Secured debts like your house or car payment must be paid but, in come cases, not all of your unsecured debt must be repaid over the life of the repayment plan. This includes medical bills and credit cards. This is all on top of your regular monthly payments. So, for instance, let's assume:
- You are $10,000 behind on your house payments, $500 on your car payments, $6,000 in back taxes and $4,000 on your student loans.
- Your current payments on your house, car and student loans total $2,400 a month.
- On top of this you have unsecured debts including credit cards.
- Your total past due is $20,500 – on a five year plan, this is $342 per month.
- On top of this, most people include their bankruptcy fees in their plan.
- This means you must pay $2,400 + $342 + your living expenses each month.
- If this is all you can manage, at the end of your plan, your credit cards and medical bills will be discharged.
For the plan to be approved and the unsecured debts discharged, you have to demonstrate that this plan is your “best effort” to catch up on your bills. This is demonstrated by devoting all of your disposable income to your debts. If you make at or below the median income for your state, you may qualify for a three year repayment plan. If it's higher, you will likely be put on a five year plan.
What Is Disposable Income?
Your definition of disposable income is likely very different from what it is under bankruptcy law. Most people think of disposable income as what's left over after all your bills and expenses each month that you can spend. The law's definition is much more strict. Your monthly net income (gross pay less employment taxes, income taxes, health insurance plan deductions, etc) is the starting point. From there, your monthly expenses are deducted (there are limits on some of these that may or may not align with your actual expenses). This is the most simplified definition of disposable income for Chapter 13.
How Is Disposable Income Calculated?
Form 22C is the sheet used to calculate your disposable income for Chapter 13 purposes. Here is what is considers specifically:
- Your last six months of income divided by six to get average monthly income
- If you own a business or work for yourself, you must calculate average monthly income
- Any money you get from rent on an asset you own, interests, dividends or royalties
- Any income from pension or retirement plans
- Any child support and/or alimony payments you receive
- Unemployment compensation
- Any other income sources
- Food, clothing, household supplies, personal care and miscellaneous expenses (this is based on your family size from federal government standards)
- Housing, utilities and non-mortgage expenses (this is also based on government standards)
- Transportation expenses including car payment (also based on government standards and actual amounts paid)
- Taxes (includes federal, state, local, employment taxes, FICA, etc)
- Mandatory payroll deductions (does not include 401(k) unless it's mandatory)
- Life insurance premiums (on yourself and filing spouse only)
- Court ordered payments (includes alimony and child support)
- Education expenses (only those required for your job or for a disabled child)
- Childcare expenses
- Cell phone and internet expenses
- Health and/or disability insurance premiums and health savings account contributions
- Contributions to the support of an elderly, ill or disabled family member
- Utilities expenses for your home
- Education expenses for dependent children under 18
- Ongoing charitable contributions
- Payments on secured debt (mortgage, car note)
- Child support and/or alimony payments you must pay
- Administrative expenses associated with the Chapter 13
All of this is taken into account. If you have money left over, your plan payments will likely have to be increased in order for your plan to be approved. Chapter 13 repayments are usually pretty stringent and don't leave you a lot of spare money or wiggle room in your budget. With that in mind, a Chapter 13 can be a great tool to help you catch up on debts, prevent your home from being foreclosed on or your car repossessed. For some people though, a Chapter 7 is a better option to get complete debt relief.
If you live anywhere in North Carolina, contact the law offices of John T Orcutt for a free consultation on Chapter 13 or Chapter 7 bankruptcy. If you're facing foreclosure, a creditor lawsuit or other dire debt collection circumstance, call us today.