What is Disposable Income in a Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is the legal process that allows you to pay your debts off in three to five years. However, before you can start the paying creditors back, you must eligible for chapter 13. In other words, in order to be eligible for chapter 13 you must have enough disposable income after you pay your monthly bills to make back payments to your creditors.

To find out if you have enough disposable income to qualify for chapter 13 bankruptcy you must take the U.S. Bankruptcy Courts’ means test. The test is a formula where you add your monthly debts together then subtract the amount from your state’s median income for your household size. When you have money left over you, fail the means test. Failing the means test is a good thing because you have enough disposable income to file chapter 13 instead of chapter 7.

After you file a chapter 13 bankruptcy petition, you start paying creditors through a repayment plan. You’ll use the disposable income you have (after you pay your bills) to make the monthly payment to a bankruptcy trustee. The trustee then gives the money to creditors.

If you have disposable income, chapter 13 may be the best bankruptcy chapter to file. Thus, it’s best to talk with a lawyer to discuss chapter 13 bankruptcy. The bankruptcy lawyer will tell you what you need to do before you file such as complete credit counseling and gathering the required documents to file.