Definition of Disposable Income

• Disposable income is the regular income you receive that you do not need to use to pay for necessary living expenses such as rent or mortgage payments, food, clothing, health care, housekeeping and daily transportation. The calculation of disposable income takes into account the fact that some people with the same income may have to pay out different ratios of their income for these necessities, depending on such variables as where they live and their level of health.
  
  

Chapter 7 Bankruptcy

• When they hear the word "bankruptcy," the type of bankruptcy that most people think of is Chapter 7 bankruptcy. In this type of bankruptcy filing, the court can choose to discharge your debts and ensure that you do not have to pay them anymore. In doing this, though, the court may seize some of your unnecessary assets. This can include any money you have saved up as a result of not spending your disposable income. If the court decides that the amount of money you have saved exceeds what you need to pay for basic living necessities, it may seize some of this money to pay your creditors.
  
  

Chapter 13 Bankruptcy

• In a Chapter 13 bankruptcy, you must present the court with a plan through which you will pay off all discharged debts over a three- to five-year period. If your petition is approved, the court will decide which debts it will include in the discharge and which debts it will not include. You will be able to pay the included debts by making lower monthly payments at lower interest rates. The court needs to know your disposable income to see whether you will be able to make payments according to your plan.
  
  

Means Test

• The court will decide how much of your income is disposable income by employing the means test. The means test consists of determining household income and comparing it to the household income for other people in that state. If your income is higher than the median income for a family of the same size in your state, the court will probably rule that you have too much continuing disposable income and it will probably not approve your petition for a Chapter 7 bankruptcy. The only exception would be if you can prove that your necessary expenditures are such that you have less disposable income than most other families of the same size in your state. However, you may still be eligible for Chapter 13 bankruptcy.