How much disposable income should a debtor pay in to a Chapter 13 bankruptcy?

One of the longstanding rules of Chapter 13 of the bankruptcy code is that debtors seeking relief under this chapter must turn over all their “disposable income” — i.e., what’s left over after paying the basic bills — to a bankruptcy trustee every month for the length of their plan, which can run as long as five years.

That’s been the rule for a long time, even before the controversial 2005 changes that made the bankruptcy laws “tougher.”

But is it a good rule? Recently there have been some suggestions that dedicating all the disposable income to trustee payments (which then get distributed to creditors according to a set formula) might not be the best way to go.

Think about saving, for instance. Most would agree, that going forward, a debtor’s best chance for financial success involves setting aside a portion of their income in a disciplined plan. Debtors are now required to take, at their own expense, post-filing financial management courses that tell them this in so many words. But the Chapter 13 rules effectively prohibit saving, by directing any spare change into the hands of creditors.

Its probably not a 100% sure-thing, but a change in the rules that allowed Chapter 13 debtors to build a modest nest egg might even help the cause of creditors, by providing an incentive for more financially strapped people to choose Chapter 13 as their bankruptcy option.

 

By Doug Beaton

This entry was posted in Chapter 13. Bookmark the permalink. Both comments and trackbacks are currently closed.