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Disposable income and Chapter 13

When people in New York run into financial trouble, they are often left wondering what they can do about it. Many are reluctant to file for bankruptcy because they have misconceptions about the process. For example, those who own a home are fearful that they will lose it as part of the case.

This is understandable. However, those who own property they wish to retain can file for a Chapter 13 and keep it if they adhere to the repayment plan. Chapter 13 bankruptcy is comparable to a consolidation loan where the payments will be made to a trustee over three or five years. In turn, the trustee will distribute funds to creditors.

This can reduce the monthly payments. Those with a job and stable income are generally best-suited to a Chapter 13. Still, some terms might be confusing. One is “disposable income.” People thinking about Chapter 13 should know what this entails.

Important points about disposable income in a Chapter 13

In the example of the person who owns a home with a mortgage, that would be a secured debt that needs to be repaid or the property will be taken away. Unsecured debt would be medical debt or credit card debt.

Unsecured claims will not need to be paid in full if the debtor pays all disposable income for a specific period. The key is that the unsecured creditors must get at least as much as they would if the debtor filed for a Chapter 7 liquidation.

The disposable income will be their income minus what it costs for their daily needs and their dependents’ daily needs, plus charitable contributions up to 15% of their gross income. Business owners’ disposable income will not count what they need to maintain operation of the business.

For answers about any aspect of bankruptcy, it is wise to have help

Chapter 13 may be the right choice for many debtors, but they need to be fully aware of how it works.

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