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Bankruptcy and disposable income
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Bankruptcy and disposable income

On Behalf of | Jun 11, 2021 | Bankruptcy |

Bankruptcy provides debtors in Shreveport/Monroe, Louisiana, a legal process to remove some unsecured debt they struggle to pay. Two common types of bankruptcy are Chapter 7 and Chapter 13, and most debtors choose Chapter 7. However, each debtor needs to meet the requirements to file either type.

How disposable income works in bankruptcy

Chapter 7 bankruptcy requires debtors to pass a two-step means test to determine if they are above the income limit. The first step compares the debtor’s income to the average income of a same-size household in the same state. If their income falls below the average income, the debtor passes and don’t have to take the second part.

Debtors with an income above the limit must not surpass the disposable income threshold, or money remaining after expenses. They commonly can’t file Chapter 7 if their disposable income is more than $227 monthly. They may qualify for Chapter 13, which uses disposable income to pay off creditors.

Allowable expenses

The IRS sets guidelines for allowable expenses based on national averages for debtors above the disposable income limit. The reason for this is to prevent abuse of Chapter 7 proceedings by high wage earners. Chapter 13 and Chapter 7 require debtors to list their expenses.

Some examples of standard or reasonable expenses include Chapter 13 fees, health care payments, vehicle payments, mortgage, rent, food, clothing, utilities and internet services. If the debtor is uncertain about reasonable expenses, they should keep records of everyday expenses.

Debtors who don’t qualify for Chapter 7 but still file for it must justify it in court. If they feel they have a legitimate reason, they should seek legal assistance to prove their case.

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