In Chapter 13 bankruptcy, you spend three or five years repaying your creditors from your disposable income before your remaining debts are discharged. To calculate disposable income, you subtract various expenses from your monthly income, including any income you receive for a disability. Disability payments are not exempt in Chapter 13.
To figure your disposable income, total your family's monthly income from all sources except child support payments. Then subtract living expenses -- not necessarily your real expenses, but what the Internal Revenue Service considers normal expenses for food, transportation, shelter and clothing in your community. Subtract your monthly payments for debts such as alimony, student loans and your mortgage, which can't be discharged. You can also set aside up to 15 percent of your pay for charitable donations. What's left is disposable income, and it all goes to your creditors.
If you want to file Chapter 13, being able to include disability income may be a plus. The bankruptcy court can reject your filing if you don't have enough money to make a payment plan worthwhile for your creditors; the more income you have, the better your chance to qualify. On the other hand, higher income means a longer payment plan: If your income is more than your state's median, the plan runs five years; if less than the median, three years.
Sometimes an individual files a payment plan, then circumstances make it impossible to keep paying. If your disability income cuts off for any reason, you can request the court lower your payments. This is usually simple if the court hasn't yet confirmed your plan; after confirmation, you have to file a motion to change the payment amounts. If it becomes impossible to pay any money, and the circumstances are outside your control, the court may agree to give you a hardship discharge and finish the plan early.
Chapter 7 bankruptcy treats disability income differently. In Chapter 7, the court will use your money and assets to pay off your creditors, then discharge your debts. One of the requirements for filing is that your average income for the six months before you file is less than the state median; you can exclude Social Security disability payments from your income, but not other types of disability payments. Depending on state or federal law, your disability income may be exempt from court seizure in Chapter 7.
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