When you file for Chapter 13 bankruptcy, you calculate your disposable income in order to determine, in part, how much you will pay through your plan. When filling out your bankruptcy paperwork, you must include almost all types of income that you receive, from whatever source, in calculating your disposable income. Here’s how it works.
When you file for Chapter 13 bankruptcy, you will include a plan to repay your creditors over three to five years. You need income to fund that plan. The amount you will be required to pay into your plan each month is based, in part, on how much disposable income you receive. Disposable income is calculated by deducting your monthly living expenses from your “current monthly income.” This is done by completing form 22C as part of your Chapter 13 bankruptcy paperwork. (Learn how to complete Chapter 13 Form 22C.)
(Learn more about the Chapter 13 Repayment Plan.)
The bankruptcy code defines “current monthly income” very broadly. It includes any amount paid to you or on your behalf on a regular basis to cover your household expenses or support for you dependents. Disposable income can include:
employment wages or salary
your spouse's income (in some circumstances)
unemployment, welfare, and some other government benefits
child or spousal support payments, and
pension or retirement benefits.
Disposable income can also mean other sources money that you have received over the last six months preceding the bankruptcy. This means that irregular sources of income, such as proceeds from the sale of your business, can be included in the plan payment calculation.
If you make voluntary contributions into a 401(k) or other retirement plan, you may not be able to continue those contributions after you file bankruptcy. That is because many states do not allow you to deduct this expense. The end result is that your disposable income is increased by the amount of retirement plan contributions that you would otherwise make during the life of your Chapter 13 plan. You might, however, be allowed to continue making payments on 401(k) loans. You should research the bankruptcy laws of your state to find out if this applies to you.
Not everything you receive must be included in the disposable income calculations. There are some exceptions, although they are few. Income that is excluded from the disposable income calculations include payments you receive as a victim of a war crime or act of terrorism.
If you file bankruptcy but your spouse does not, you might not have to include your non-filing spouse's income in the disposable income calculations. If your spouse does not share the same household with you, then you may not have to include that person's income.
If you share the household with your spouse, then you probably have to include that income as part of the plan payment calculations. You may, however, be able to deduct your spouse's personal and separate expenses from the disposable income calculations. This is called the “marital adjustment.” For more information, see The Marital Adjustment Deduction.
Usually, you are required to disclose in your bankruptcy schedules all sources of income that your receive, including social security income. However, that does not mean you must include it as current monthly income for the purpose of paying it into your Chapter 13 plan. That will depend on where you live. The bankruptcy code specifically excludes social security from its definition of “current monthly income.” A large number of states (or districts) agree, and do not require you to include social security in calculating disposable income. You should research the bankruptcy laws of your state or district to find out more.
Even if you are not required to commit your social security benefits from the disposable income calculation, you may decide to include them anyway if they help you fund your Chapter 13 plan.