Definition of Disposable Income in The Bankruptcy Process

Definition of disposable income in the bankruptcy process means what type of income people have after their monthly bills are paid. Disposable income is vital in bankruptcy cases. For people, it can be the difference between repaying creditors and just eliminating their debts without replaying. In fact, the U.S. Bankruptcy court has created a way for lawyers and people to determine if there is any disposable income left for people facing bankruptcy.

Definition of Disposable Income

Disposable income is the amount of money left over after paying your allowed monthly expenses which allows people to pay off at least a part of their unsecured debts. These unsecured debts typically include credit card bills. In other words, if people have enough money each month remaining after they pay their bills for things they don't need such as another television or a second car, then they have enough money to repay their creditors.

Disposable Income Defines Bankruptcy Options

Personal bankruptcy gives people two pathways to financial freedom. Chapter 7 bankruptcy allows people to eliminate, or discharge, their debts without repaying creditors. Also, chapter 7 stops any attempts at debt collection creditors have such as wage garnishments and lawsuits. People with disposable income have another pathway, chapter 13. Chapter 13, also called the wage earner's play, allows people to creditors in three to five years. The amount of time depends on the amount of disposable income people have. More importantly, chapter 13 comes with a stronger automatic stay than chapter 13. People filing chapter 13 can stop their homes from being foreclosed on. Chapter 7 can't do that.

Means Test Determines Disposable Income

To calculate disposable income, people must know their monthly income. This is amount of money people make every month. Then they must compare their monthly income to the median state income for their household. Thus, if people have a spouse and five children, they have to compare the state's median income of six people to their income. Less money means chapter 7. More money means chapter 13.

Seek a Lawyer's Guidance

People may calculate their monthly debt to state income level and find out they have a lot of disposable income even though it's not so. Thus, seeking bankruptcy lawyers' guidance is helpful. Bankruptcy attorney can go over the means test and make sure people haven't added income such as social security payments that the U.S. Bankruptcy court doesn't consider as monthly income.