What Is Disposable Income in Bankruptcy? An Arizona Guide

In bankruptcy, your disposable income is the money left over each month after paying for necessary living expenses, as determined by law. This single figure is one of the most critical elements of your bankruptcy filing, as it directly impacts your eligibility for different bankruptcy chapters and the structure of your repayment plan.

Why Your Disposable Income is the Most Important Figure in Your Bankruptcy Case

Understanding your disposable income is essential because it serves two different but equally important functions depending on the type of bankruptcy you file.

In Chapter 7 Bankruptcy: Your Key to Qualifying

To qualify for Chapter 7 bankruptcy, you must pass the “Means Test.” This test compares your household income to the median income for a household of your size in Arizona. If your income is below the median, you generally qualify automatically.

However, if your income is above the median, you can still qualify if your disposable income is low enough. The Means Test calculates whether you have enough disposable income to make meaningful payments to your creditors. A low or negative disposable income indicates you do not have the means to repay debts, making you a candidate for Chapter 7 debt liquidation.

In Chapter 13 Bankruptcy: The Foundation of Your Payment Plan

In a Chapter 13 bankruptcy, you repay a portion of your debts over three to five years. Your disposable income is the starting point for determining your monthly payment amount. Under the U.S. Bankruptcy Code (11 U.S.C. § 1325(b)), you are required to commit all of your projected disposable income to your repayment plan to pay back unsecured creditors, such as those holding credit card debt or medical bills.

How to Calculate Your Disposable Income (A Step-by-Step Guide)

The formula for disposable income seems simple, but the components are based on strict legal standards, not just your personal budget.

Step 1: Determine Your Current Monthly Income (CMI)

First, you must calculate your Current Monthly Income (CMI). This is the average of all income you received from nearly all sources during the six full months before you file for bankruptcy. This includes wages, business income, rental income, and even contributions to household expenses from others.

Step 2: Subtract Your Allowed Monthly Expenses

Next, you subtract a series of allowed expenses. Crucially, these are not always your actual spending habits. Instead, they are based on a combination of your real costs and standardized figures from the IRS.

Allowed expenses include:

• National Standards: Standardized amounts for food, clothing, personal care, and out-of-pocket healthcare costs.
• Local Standards: Figures for housing, utilities, and transportation costs that vary by state and even county. For example, the housing allowance for Maricopa County will differ from that for Pima County.
• Actual Expenses: Payments on secured debts (like your mortgage and car loan), priority debts (like child support or recent taxes), health insurance premiums, and other necessary costs.

Step 3: The Result is Your “Disposable Income”

The final calculation is straightforward:

Current Monthly Income – Allowed Monthly Expenses = Disposable Income

This resulting number is what the court uses for the Means Test and to establish your Chapter 13 payment plan.

A Practical Example: Calculating Disposable Income in Phoenix, AZ

Let’s consider a hypothetical individual named Alex who lives in Phoenix, Arizona.

• Current Monthly Income (CMI): Alex’s average gross income over the last six months is $5,500.
• Allowed Monthly Expenses: After calculating all standard and actual costs according to Arizona’s local standards, Alex’s allowed expenses total $5,100. This includes standardized amounts for food and utilities, plus actual mortgage and car payments.
• Calculation: $5,500 (CMI) – $5,100 (Allowed Expenses) = $400 (Disposable Income)

In this scenario, Alex has $400 in monthly disposable income. This amount would likely be too high to pass the Chapter 7 Means Test but would serve as the basis for a $400 monthly payment in a Chapter 13 repayment plan.

Common Questions About Disposable Income in Arizona

What happens if my income changes during my Chapter 13 plan?

If you experience a significant and long-term change in income or expenses (such as a job loss or a new medical condition), you can petition the court to modify your plan payments. The bankruptcy trustee and your attorney will review the change to determine if an adjustment is necessary.

Are my 401(k) contributions or loan repayments considered disposable income?

Generally, voluntary contributions to a retirement account are not considered a necessary expense and are treated as disposable income. Repayments on loans taken from a 401(k) are typically allowed as an expense, but this can be a complex area.

What if my necessary expenses (like medical bills) are higher than the IRS standards allow?

It is possible to claim expenses that are higher than the standard IRS allowances, but you must provide thorough documentation and a reasonable explanation for why these costs are necessary for the health and welfare of you or your dependents.

Get a Precise Calculation with an Experienced Arizona Attorney

Calculating your disposable income is a technical process where accuracy is paramount. An error can lead to your case being dismissed or cause you to pay more than required in a Chapter 13 plan. The best way to ensure your forms are accurate and your rights are protected is to work with a knowledgeable bankruptcy lawyer.

If you are considering bankruptcy in Arizona, contact Gaudiosilaw today for a consultation. Our experienced team can help you understand your options and guide you toward a fresh financial start.