The chapter 13 disposable income test is the court’s way of ensuring that all your disposable income is going towards repaying your debts during your repayment period.
Prior to approving any chapter 13 repayment plan, you must show that what you are paying is your best effort. It shows that you are proving all disposable income to the plan.
Your disposable income is what remains after you’ve deducted all living expenses such as food, clothing, housing, utilities, insurance, childcare expenses, medical expenses and insurance costs and mandatory payments.
As you move forward with the chapter 13 disposable income test, it’s important to consider:
- Priority and Secured Debts: Priority debts such as alimony or child support are the first in line for repayment. Likewise, secured debts such as mortgages or car loans can be included.
- Non-Priority Unsecured Debts: After priority and secured debts, disposable income then goes towards any remaining non-priority unsecured debts. These would include things like credit cards or medical bills.
Median Income and Why It Matters
Since non-priority unsecured debts take last priority in chapter 13 repayment, filers often wonder how much they’ll repay towards this type of debt.
For instance, repayment of non-priority unsecured debts is determined in the following manner. Compare your average monthly income in relation to the median income for your state.
- If Your Income is Below the State Median Income. You don’t need to calculate disposable income. You may end up paying nothing towards your non-priority, unsecured debts.
- If Your Income is Above the State Median Income. You’ll calculate your disposable income in this manner. Take your monthly income and deduct living expenses, priority debt payments, and secured payments. The remaining amount is your disposable income. You’d are responsible to pay this amount to creditors each month.
If your income is above the median income, put the remainder of your disposable income towards non-priority and unsecured debts.
This shows the courts that you are putting forth your “best-effort” at repaying your debts.
Help Understanding the Chapter 13 Disposable Income Test
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For more information about chapter 13 disposable income test, or to learn more about how our legal team may be of service to you, contact our offices to schedule your free consultation today!
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