What is Disposable Income?
"Disposable Income" is the difference between your income and your necessary living expenses. More importantly, if you have significant disposable income, you may not be able to file a chapter 7 bankruptcy and may be forced to file a chapter 13 bankruptcy instead. Also, in chapter 13, the amount of your disposable income will become the minimum amount that you will have to pay to your creditors.
Determining disposable income is the most contentious issue between you and the bankruptcy trustee. The law requires that the trustee review every chapter 7 bankruptcy case to determine whether your income has been understated, or your living expenses have been overstated. In other words, the trustee will look at every chapter 7 bankruptcy case to see if you can be forced out of chapter 7 and into chapter 13 bankruptcy, where some payment will be made to creditors.
In chapter 13 bankruptcy, the trustee’s primary focus is on maximizing the amount paid to unsecured creditors. The amount paid to unsecured creditors in chapter 13 bankruptcy is based on the amount of your disposable income. The trustee will scrutinize your income to make sure that all income is being reported. The trustee will also object to unnecessary expenses and limit you to only those expenses that are necessary and reasonable for living.
How is Disposable Income Determined?
Disposable income is determined in two ways. First, it is calculated by taking an average of your actual income for the last 6 months and subtracting certain expenses that are allowed by the law (it's a mathematical formula that looks backwards to determine the future - "Means Test"). Second, it will also be determined by looking at your actual income, now and for the foreseeable future, and subtracting your current and foreseeable reasonable and necessary expenses. Calculating disposable income under the Means Test is like calculating taxable income on a Form 1040; it’s a technical process and requires attention to detail. Determining disposable income from your current income and expenses is a matter of budgeting. It is a task some of us are good at; but most of us are not acquainted with either the concept or the process.
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The statements of law made here are general statements of law, effective at the time published and subject to change from time to time. These statements are not intended, nor may they be construed, to be applicable to any particular set of factual circumstances nor to any particular person. I recommend that all readers seek the assistance and advice of an experienced bankruptcy lawyer for guidance in their particular circumstances.
© Copyright 2013 David C. Hoskins, licensed Colorado lawyer