What happens to my “disposable income”?

Under the old rules, people who filed under Chapter 13 had to devote all of their disposable income — what they had left after paying their actual living expenses — to their repayment plan. The new law adds a wrinkle to this equation: Although Chapter 13 filers still have to hand over all of their disposable income, they have to calculate their disposable income using allowed expense amounts dictated by the IRS — not their actual expenses — if their income is higher than the median in their state. These expenses are often lower than actual costs.

What’s worse, these allowed expense amounts must be subtracted not from the filer’s actual earnings each month, but from the filer’s average income during the six months before filing. This means that debtors may be required to pay a much larger amount of “disposable income” into their plan than they actually have to spare every month — which, in turn, means that many more Chapter 13 plans will fail.

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