Disposable income is calculated using a means test. A means test calculates income for the last six months and then deducts standard IRS deductions in order to determine if the debtor has disposable income. Standard IRS deductions are not all based upon the debtor’s actual expenses. They are based upon the average expenses for a household size where the debtor lives. Basically, these deductions are what the IRS thinks the debtor should be spending each month for these expenses.
The means test is used to determine the plan payment amount in a Chapter 13 bankruptcy case but then the debtor must file schedules to show that they can actually afford the plan payment based upon their current income and budget. A schedule I shows all sources of income that the debtor receives each month and takes out withholdings. The bottom figure on the form is the debtor’s net income. Schedule J shows the debtors budget. At the bottom of schedule J the total expenses are deducted from the net income. The resulting amount is what is used to pay the debtor’s plan payment to the trustee each month.
It is possible for a debtor to have significant disposable income on their means test but not nearly enough money left over on their schedule J in order to pay the plan payments. When this happens I will usually review the budget with my client to determine what expenses can be reduced or cut altogether. Most debtors are open to my suggestions. It is in their best interest to make the bankruptcy case work and so they are willing to do whatever must be done to succeed in their case.
However, there are debtors who think they should be able to continue paying for their country club membership, budget $1,000 a month for recreation expenses, and continue paying for their lake house or their RV, while they are in bankruptcy. The bottom line is that if they can continue paying for these expenses and pay back all of their creditors in their plan, then there is nothing preventing them from doing so. However, any Chapter 13 plan that allows a debtor to continue paying for luxuries when the creditors are not being paid in full will not be approved by the court.