Disposable income in above-median Chapter 13 cases is calculated using a means test. Debtors list all of their income for the last six months, excluding any funds paid to them by the Social Security Administration. Next, we calculate the deductions available to the debtor. Deductions include monthly expenses like income tax, health insurance, out of pocket medical expenses, insurance premiums, car payments, house payments, etc. There are additional deductions available on the means test but they are too numerous to list here. Once the total deductions are calculated then that number is deducted from the average income for the last six months.
The sum of the average income and the deductions represents disposable income. If this number is negative then the debtor has no disposable income and will not have to pay the unsecured creditors in the plan. However, if the number is positive then the debtor must dedicate that amount each month to the unsecured creditors. For example, if the disposable income is $200 then the debtor’s plan must pay unsecured creditors at least $12,000 over the life of the sixty month plan.
There is another consideration though. Suppose the debtor’s income has dropped and is currently lower than the average of the last six months. If this decrease in income is likely to continue then an argument can be made at confirmation that despite what the means test shows the debtor doesn’t truly have any (or as much) disposable income as is shown. If the trustee agrees with this assessment then the amount needed to pay to the unsecured creditors is recalculated using current income.
The reverse is true as well. Suppose the debtor’s income today is much higher than the average for the last six months. The trustee may determine that the debtor has the ability to pay unsecured creditors even though the means test shows they have no disposable income.