There are many situations where debts can affect a person or family, making it difficult or impossible to maintain financial stability. When debts become overwhelming, bankruptcy can provide relief by eliminating certain types of debts and giving a person a fresh start. When filing for bankruptcy, a person’s disposable income will be one of the primary factors that will be considered. Understanding how disposable income is calculated and how it will affect a bankruptcy case can help a person determine the best ways to proceed as they work to pursue relief from their debts.
How Disposable Income Affects the Means Test in a Chapter 7 Bankruptcy
For many debtors, Chapter 7 is the preferred type of bankruptcy, since it can be completed fairly quickly, and it will usually allow unsecured debts (such as credit cards or medical bills) to be discharged completely. However, before they can file for Chapter 7, a person will need to pass a “means test.” The first part of the means test compares a person’s income to the median income in their state. If their income is less than the median income for their family size, they can file for Chapter 7.
If a person’s income is higher than the median income, the means test will look at their disposable income to determine whether they will be able to file for Chapter 7 bankruptcy. Disposable income is calculated by taking the average income a person earned from all sources over the previous six months and deducting certain types of expenses, including taxes, living expenses, healthcare costs, transportation costs, life insurance premiums, and domestic support obligations such as child support. If a person’s disposable income over the next five years (their monthly disposable income times 60 months) is lower than 25 percent of their total unsecured debts, they will be able to file for Chapter 7 bankruptcy.
Disposable Income in a Chapter 13 Repayment Plan
If the means test finds that a debtor cannot file for Chapter 7, they may pursue a Chapter 13 bankruptcy. Chapter 13 may also be the preferred option for those who do not want to turn over certain assets, such as when a person wishes to retain ownership of their home or vehicle. In a Chapter 13 case, the debtor will make monthly payments toward a repayment plan for three to five years. In a Chapter 13 case, a person’s disposable income will be calculated using the same methods as in the Chapter 7 means test. The debtor will pay this amount on a monthly basis to the bankruptcy trustee, who will distribute the payments to creditors. After the repayment plan has been completed, the remaining balances of any unsecured debts that were included in the plan will be discharged.
Contact Our Hudson Valley Bankruptcy Lawyer
If you are considering bankruptcy, you will want to make sure all of your income and expenses will be addressed when calculating your disposable income. Law Offices of Robert S. Lewis, P.C. can work with you to compile all of the necessary information related to your income and expenses, and we will make sure all forms are completed and filed correctly. We will also advise you on how to address any issues you may encounter during the bankruptcy process, and we will make sure you take the correct steps to receive relief from your debts. To learn more about how we can help address your financial issues, contact our Rockland County bankruptcy attorney at 845-358-7100 and arrange a free consultation today.