What is “Disposable Income”?

The Bankruptcy Code was changed by the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). That legislation says that everyone considering bankruptcy must now examine their income to determine whether they make more or less than the median income prevailing in their State. Therefore:

If you are below the median income level for your State

  1. You can file for Chapter 7 liquidation (the kind most people want)
  2. You may file for Chapter 13 reorganization (where you repay creditors on some level)

If you are above the median income level for your State then

  1. You may not file Chapter 7 without being rejected for “substantial abuse” of the system.
  2. You must file Chapter 13

So what is disposable income anyway? According to the BAPCPA disposable income is calculated as:

Monthly Income from all sources
- Living Expenses of the Debtor plus Dependent(s)

If you are below the median income level for your State Then living expenses are what you actually spend food, gas, shelter, etc.

If you are above the median income level for your State Then living expenses are what the IRS thinks you should spend for food, gas, etc.