In our overviews of Chapter 13 cases and Chapter 13 Plans, we used the term “Disposable Income.” Disposable Income is one of the most important components of a Chapter 13 case and Plan because that is the portion of your income that you have to contribute to the Plan (via the Chapter 13 Trustee) to pay your unsecured debts and past-due secured debt payments. What is this number? In its most simple form it is your Current Monthly Income less your (and your dependents’) monthly living expenses, domestic support obligations (alimony and child support) and certain qualified charitable contributions. Disposable Income is calculated by completing Form 22C, and while it is similar to the Means Test calculations for a Chapter 7 case, it is slightly different and geared more toward future (post-filing) income and expenses rather than just the last six months average income.
Importantly, Disposable Income is not merely an exercise of you completing a budget that works for you and your family, based on what you have spent on certain expenses in the past. A quick look at Form 22C shows it is much more complicated than that. While some expenses, such as your house payments, rent, alimony and child support are fairly easy because they are usually firm numbers, other expenses are based upon local standards based on family size. For example, you will not be able to propose a household budget based on buying groceries at Whole Foods and dining out for lunch and dinner several times a week. Your entertainment and recreation expenses will not include club memberships, several $100 rounds of golf and the like. If you have boats, recreational vehicles, third or fourth vehicles, or second homes (other than rental homes with positive cash flow), you likely will have to give up significant expenses (including loan payments) associated with those items. This certainly should not turn people away from Chapter 13, as any short-term sacrifices are far outweighed by the benefits of getting your financial house in order for the long-term. In fact, most people who enter Chapter 13 either do not have those extra expenses or they have already trimmed their budget because of debt payments. Some people raise their standard of living in a Chapter 13 Plan.
A few other notes about Disposable Income:
- If a marred couple files a joint Chapter 13 case, the calculations of income and expenses is normally straightforward as the Current Monthly Income of both is included. If, however, only one spouse files, the non-filing spouse’s income is generally included to the extent of their contributions to the household living expenses. If both people contribute to the monthly house payments, that is included in the calculations of Disposable Income. However, the non-filing spouse does not have to bear the full burden of the Plan and the debtor-spouse’s debts. If the non-filing spouse makes enough money to pay for dining out, recreation, vacations, and the like, they are free to spend their own money for themselves and for the family. It is very important to have a good Bankruptcy lawyer when determining Disposable Income when only one spouse is filing.
- Bankruptcy law is not so draconian that you cannot claim certain expenses higher than the local averages. Your daily commute may be longer, requiring more gas money. If you have an old drafty house like mine, your utility bills may be higher. You may have uninsured medical expenses or require a special diet because of a health issue. You just need to be able to document these expenses.
- If you are self-employed, you can claim the additional expenses for your business in your budget. It is critical that a self-employed person (or someone working on commission) have a very good lawyer for their Chapter 13 case, since determining monthly income and expenses is normally much more complicated than a case with someone who has a fairly stable income from month to month.
- Certain unusual or one-time payments may also count toward the Disposable Income you must contribute to your Plan. This includes bonuses, commissions, tax refunds, and some lawsuit recoveries. Other payments, such as gifts from family, do not count as we do not want to penalize families who want to help out each other.
- If you and your lawyer carefully review all of your income and expenses and complete the appropriate forms, and you only show a very small amount of monthly Disposable Income, you still may qualify for a Chapter 7 even if you “fail” the Means Test. Granted, the Disposable Income must be relatively small, but the Trustee and Court take into account the expenses of the Chapter 13 Trustee and the other burdens of administering a case that will have only a miniscule return to unsecured creditors. If the income and expenses can be well-documented, and the case is filed in good faith, it still may be possible to file a Chapter 7 case, if so desired.
- Most people have changes in their Current Monthly Income over time, and others may also have changes in their allowed expenses. These must generally be handled by an amendment to the Plan.
Chapter 13 is a very complicated process and the chances of getting a confirmed Plan, much less completing the Plan and getting a discharge, without a good lawyer are very low (close to 1% in some studies). Although there are various online calculators to help you get a very general idea of what your Disposable Income might be, many are not updated, and none of them really have the capability of including every item of income and expenses you have. Others are just gateways to use your personal information to steer you to a paid referral site that sells your information to lawyers. Never provide anything other than a city or state on these sites. If they have any identifying information about you – especially your name, and even your email address – they automatically have your identity and financial information. There is no replacement for a meeting or two with a good Bankruptcy lawyer in your area. It is almost always free and allows you and the lawyer to review your specific financial situation. If you are in Georgia, you can contact us.