What is disposable income for purposes of a Chapter 13 bankruptcy?

In determining how much you have available to pay your debts for purposes of a Chapter 13 filing, the courts will apply living standards specified under IRS National and Local standards to determine what is reasonable to pay for food, clothing, rent, housekeeping, and so forth. Whatever is left over from your net income after required payroll deductions and allowable expenses after applying the means test formula is disposable income. Put another way, it is the amount of money you have at your disposal to be eligible to file a Chapter 13 repayment plan. 

Social Security benefits, payments to victims of war crimes or crimes against humanity, and payments to victims of terrorism (i.e., World Trade Center victims) are not included in the calculation of income. However, if you co-mingle, or combine, the proceeds of exempt benefits with your regular income, a creditor may be able to argue that the co-mingling has changed the nature of the benefit—especially if you cannot differentiate which part of the money in your checking account came from social security benefits versus a part-time job.

Issues also arise about whether income from non-employment sources, such as family and friends, or income from seasonal work, should be counted. Issues frequently arise about whether certain expenses should be counted in determining disposable income. Resolving these issues generally requires the advice of an experienced attorney. If you receive money from any source, advise your attorney so they can address the nature of income and properly calculate your disposable income.

Case Studies: Understanding Disposable Income in Chapter 13 Bankruptcy

Case Study 1: Struggling to Determine Disposable Income

Emily, a single mother with a part-time job and social security benefits, sought to file for Chapter 13 bankruptcy to manage her debts. However, she faced challenges in accurately calculating her disposable income due to the co-mingling of her social security benefits and regular income. Emily needed guidance from an experienced attorney to ensure that her filing complied with the IRS standards and included only the appropriate income sources.

Case Study 2: Dealing With Seasonal Income

John, a freelance worker with fluctuating income from seasonal projects, considered Chapter 13 bankruptcy to address his financial situation. However, the irregularity of his earnings raised questions about how to determine his disposable income. John needed legal advice to assess whether his seasonal income should be counted and how to establish a feasible repayment plan based on his variable earnings.

Case Study 3: Navigating Expenses and Income Sources

Sarah, a retiree with various sources of income, including support from family and friends, faced uncertainty about which expenses and income sources would be considered for calculating disposable income. Her unique financial situation required the expertise of an experienced attorney who could appropriately analyze her income streams and expenses to determine the eligibility and feasibility of a Chapter 13 repayment plan.