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

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jun 19, 2018

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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.

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