Definition of Income for Chapter 13 Filing
Under Chapter 13 bankruptcy, a debtor must have enough disposable income to pay some secured debts and priority debts in full over the life of the plan. The debtor must also be able to pay unsecured creditors an amount equal to the value of nonexempt property. Consequently, the debtor's income is an important factor in the determination of an acceptable Chapter 13 plan.
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Current Monthly Income and the Means Test
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The means test determines whether a debtor can file for Chapter 7 or Chapter 13. The means test calculates a debtor's current monthly income by averaging the debtor's income over a six-month period. If Form 22C shows that a debtor's current monthly income falls below the median income in his state, the debtor may file under either bankruptcy code. If a debtor chooses Chapter 13, she can propose a three-year repayment plan instead of a five-year repayment plan.
Current Income of Individual Debtors
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A debtor must also complete Schedule I, "Current Income of Individual Debtor(s)." Because the form allows the debtor to subtract payroll deductions, the average monthly income may differ from that shown on Form 22C. The bankruptcy court defines income as the following: monthly gross wages, salary, and commissions; regular income from the operation of a business or profession or farm; income from real property; interest and dividends; alimony, maintenance, or support payments; Social Security or government assistance; and pension or retirement income.
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Disposable Income: Minus Expenses
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To propose a Chapter 13 repayment plan, the debtor must have enough disposable income to fund it. Disposable income is the income the debtor has after subtracting necessary expenses and debts. Allowable expenses include rent or home mortgage payment, utilities, food, home maintenance, clothing, dry cleaning, transportation, recreation, charitable contributions and insurance.
Disposable Income: Minus Debt Payments
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When calculating disposable income, a debtor will subtract the following from his base income: installment payments, priority debt payments, secured debt arrearages (past due payments on a car loan or a mortgage) and debts secured by a lien. Installment payments include payments for a car, furniture, electronics and jewelry. Priority debts are typically child support or alimony payments. A debtor will also have to pay off any liens for back taxes or mechanic's liens in the Chapter 13 plan.
Projected Income vs. Actual Income
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A debtor's disposable income reported on Form 22C may differ from the actual income reported on Schedule I. The difference may make it appear that the debtor does not have enough disposable income to fund a Chapter 13 repayment plan. Depending on the bankruptcy court, the court may confirm a plan based on the disposable income calculated on Form 22C, may consider confirming a plan based on actual income and expenses or may only evaluate a plan based solely on the debtor's actual income.
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