Disposable income — what it is and how much of it you have — is one of the most important determining factors in whether your bankruptcy will be filed under Chapter 7 (allowing you to discharge almost all of your debt) or Chapter 13 (in which your debts are reorganized and you keep paying them over the next few years). Let’s look at what happens when you file for bankruptcy.
There are pros and cons for each kind of bankruptcy. While Chapter 7 has the advantage of wiping the slate clean of all debts, it also makes important assets vulnerable to being sold and the proceeds used to pay off creditors. The decision on which type of bankruptcy is most appropriate for you is based on a means test in which the debtor’s income is compared to the median of others of the same family size in their state. If their income is lower than the median, then they immediately qualify for a Chapter 7 bankruptcy. If their income is higher than that median then the bankruptcy trustee will take a closer look at how much money they have left each month after having paid expenses including housing, healthcare, food, and transportation, as well as life insurance, taxes, and child support (if applicable). This amount is defined as disposable income. It is multiplied by 60 to represent a span of five years, then compared to the debts that they owe. If their disposable income represents less than 25% of what they owe, they are determined to qualify for Chapter 7, but if it is more than 25% of their total unsecured debt then the trustee concludes that disposable income can be used to pay for debt, and they are required to file for bankruptcy under Chapter 13.
Even if disposable income isn’t enough to fully pay off debts, under a Chapter 13 bankruptcy it must be used for a prescribed period of time to make payments to creditors. After that time period is over, any remaining debt is discharged.
Interestingly, people who qualify for Chapter 7 bankruptcy may have less disposable income to start with, but they end up keeping more of their disposable income than do the people who are required to file under Chapter 13.
If you would like more information on how filing for bankruptcy would affect you, contact us today to set up a time for us to meet.
