- The bankruptcy court starts calculating your disposable income by figuring your average income for the six months before you filed. All income from all sources except child support will be included. If your income was abnormally high during that period --- you received a big payout for taking early retirement, for instance --- the court can exclude that from its calculations to get a realistic picture of what you can pay on a month to month basis.
- To figure your disposable income, the court must exempt the income that isn't disposable, the money you and your family need for food, shelter, clothing and transportation. The court will use IRS figures of what a family of your size in your community needs, not your actual expenditures: The fact that you spend $5,000 a month on clothes, for example, doesn't entitle you to exempt all that income. You are entitled to exempt up to 15 percent of your gross income if you donate it to charity.
- In Chapter 13, bankruptcy law divides your debts into three classes. Priority debts are the ones you can't discharge, such as child support, alimony and most back tax debts. Secured debts such as a mortgage or an auto loan give your creditor a claim on your property if you default and can't be discharged without losing your property. Everything else --- credit card bills, personal loans, medical bills --- constitutes an unsecured debt. The money you need to pay off secured and priority debts isn't counted as disposable income.
- The more disposable income you have, the more money will go to your unsecured creditors. If your income is below the state median, you'll spend three years paying your creditors back; if above, five years. An advantage of Chapter 13 is that if you have back payments due on your mortgage, child support or other loans that survive bankruptcy, you can make them up as part of the plan, provided you keep up current payments. Any unsecured debts left unpaid at the end of the plan will be discharged.
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