Disposable Income in Chapter 13: What Counts and What Doesn't

Why Disposable Income Matters in Chapter 13

Disposable income is the engine that drives a Chapter 13 plan. Under 11 U.S.C. § 1325(b), if the trustee or any unsecured creditor objects, you must commit every dollar of projected disposable income into plan payments. In practice, disposable income sets the floor for your monthly payment — and a $100/month swing in the calculation equals $6,000 over a 5-year plan. That's not a rounding error, it's a down payment on a used car.

Here's the thing — the calculation isn't as simple as "income minus bills." Bankruptcy law uses specific definitions for both income and expenses that may differ significantly from your everyday understanding. Understanding these definitions — and knowing which expenses are allowed and which aren't — can make a meaningful difference in your monthly payment. Even a $100/month difference in the disposable income calculation amounts to $6,000 over a five-year plan.

Calculating Your Current Monthly Income

Disposable income starts with "current monthly income" (CMI), defined in 11 U.S.C. § 101(10A). CMI is your average monthly gross income from all sources during the six full calendar months before filing. This includes wages, salary, tips, bonuses, overtime, commissions, self-employment income, rental income, pension income, unemployment compensation, workers' compensation, alimony or support received, and regular contributions from a spouse or other person. Notably, Social Security benefits are excluded from CMI.

The six-month lookback period can create distortions. If you received a large bonus, severance payment, or tax reimbursement during the lookback period, it inflates your CMI and increases your calculated disposable income — even if your ongoing income is much lower. Conversely, if you recently started a new, lower-paying job, the lookback may include months at a higher salary. Courts have discretion under the Supreme Court's Lanning decision (Hamilton v. Lanning, 2010) to adjust projected disposable income based on known or virtually certain changes to the debtor's income or expenses.

For married couples, CMI includes both spouses' income regardless of whether they file jointly or individually. However, if only one spouse files, the non-filing spouse's income is included in CMI but a deduction is taken for the non-filing spouse's separate expenses (the "marital adjustment"). This can be a complex calculation — our Chapter 13 Payment Plan Calculator helps you work through it.

Above-Median vs. Below-Median Income: Different Expense Rules

How your expenses are calculated depends on whether your CMI is above or below the state median income for your household size. If your income is above the median, you must use the IRS National and Local Standards to determine most of your allowable expenses. If your income is below the median, you can use your actual expenses as long as they are "reasonably necessary" for your maintenance and the maintenance of your dependents.

The distinction matters because the IRS standards may be higher or lower than your actual expenses. A below-median debtor who spends $2,500 on housing can deduct $2,500 (if reasonable). An above-median debtor in the same county might be allowed only $1,800 under the IRS Local Standard — or might be allowed more if the standard is $2,700. The IRS standards are published at irs.gov/businesses/small-businesses-self-employed/means-testing and vary by county for housing/utilities and by region for transportation.

This creates an important strategic consideration. Some debtors whose income is just above the state median may benefit from waiting to file (allowing high-income months to fall out of the lookback period) or from legitimate expense adjustments that reduce their calculated disposable income. Conversely, below-median debtors with unusually low actual expenses may end up with higher disposable income than they expect. The calculation requires careful attention to detail.

Allowable Expense Categories

For above-median debtors, the IRS standards cover five main categories. The National Standards set fixed amounts for food, clothing, housekeeping supplies, personal care products, and miscellaneous expenses. The Local Standards set county-specific amounts for housing and utilities (mortgage/rent, property taxes, insurance, maintenance, utilities) and regional amounts for transportation (vehicle ownership costs, operating costs, and public transportation). These amounts are non-negotiable — you use the published figures regardless of your actual spending.

Beyond the IRS standards, above-median debtors can deduct actual amounts for several additional categories: health and disability insurance premiums, court-ordered payments (child support, alimony), involuntary payroll deductions (taxes, Social Security, mandatory retirement contributions), telecommunications ($75/month standard), education expenses for minor children (up to $208.33/month per child for private school if the debtor can demonstrate a public school alternative is inadequate), and child care expenses necessary for employment.

Secured debt payments — your actual monthly mortgage, car loan, and other secured obligations — are deducted at their actual amount. This is one of the most significant deductions because mortgage and car payments are often the largest items in a household budget. The deduction applies to the contractual payment amount, including any arrears cure amount built into the Chapter 13 plan. For below-median debtors, the same categories of expenses are allowable but based on actual rather than standardized amounts.

Expenses That Are Not Allowed

Not every expense you incur is deductible for disposable income purposes. Payments on unsecured debt (credit cards, medical bills, personal loans) aren't deductible — these are the very debts the plan is designed to address. Charitable contributions beyond 15% of gross income are generally not allowed, though contributions up to 15% are specifically protected under 11 U.S.C. § 1325(b)(2)(A)(ii). Entertainment expenses, vacation costs, and other discretionary spending aren't deductible.

Luxury items and non-essential expenses will be scrutinized by the trustee. Private school tuition for children (above the limited allowance for above-median debtors), excessive housing costs, expensive vehicle payments (beyond what is necessary for reliable transportation), and costs associated with recreational activities are areas where trustees frequently object. The standard is "reasonably necessary" — not "accustomed to" or "desired."

Voluntary retirement contributions beyond the employer match present a contested area. Some courts allow ongoing 401(k) contributions as a deduction from disposable income, reasoning that retirement savings are reasonably necessary. Others disallow voluntary contributions, arguing that creditors should not subsidize the debtor's retirement while receiving pennies on the dollar. The outcome varies by jurisdiction and by the specific facts of each case.

The Lanning Decision: Adjustments for Changed Circumstances

In Hamilton v. Lanning (2010), the Supreme Court addressed a fundamental question about Chapter 13 disposable income: must the court use the mechanical six-month CMI calculation even when it doesn't reflect the debtor's actual ongoing income? The Court held that "projected disposable income" under § 1325(b) isn't simply a mechanical projection of the historical CMI — courts may account for known or virtually certain changes in income or expenses.

This means that if you lost your job during the six-month lookback and now earn significantly less, the court can reduce your projected disposable income accordingly. Conversely, if you received a one-time windfall (like an inheritance) during the lookback period, the court can exclude it from the projection. The key is that the change must be "known or virtually certain" — speculative future changes aren't sufficient.

The Lanning decision is particularly important for debtors with irregular income, recent job changes, or forthcoming expenses (like a child aging out of child care, or a car loan that will be paid off during the plan). Your bankruptcy attorney can use Lanning to argue for adjustments that make your plan payment more accurate and sustainable. Use our Debt-to-Income Ratio Calculator to get an initial picture of your income-to-expense ratio before diving into the detailed means test calculation.